Another highly anticipated and possibly controversial proposed regulation will establish CBAM for certain imported products. The Commission uses it as a measure to ensure that Europe’s ambitious climate action does not lead to a “carbon leak” by driving carbon-intensive production out of the single European market, but instead encourages the EU’s international partners to promote global emissions reductions. And their industry is moving in the same direction.
Products within the scope of CBAM are listed in Annex I. Annex II excludes EFTA countries (but not the United Kingdom) from the scope of CBAM. Regarding electricity, the final proposal states that once a third country is fully integrated into the European Internal Energy Market (IEM) through market coupling, technical solutions should ensure that CBAM is applied to electricity exported from these countries to the EU customs territory. If no technical solution is found, such third countries should enjoy the CBAM exemption by 2030 at the latest. This exception will apply under certain conditions, including formulating a roadmap, implementing a carbon pricing mechanism, providing EU ETS, and committing to achieve carbon neutrality by 2050, as well as EU rules in the fields of energy, environment and competition.
Importers must seek authorization from the CBAM authority to purchase certificates covering their annual imports from that authority and surrender them. The number of certificates required depends on the amount of emissions embedded in the import, which is declared by the importer and verified by an independent certification body (according to the method specified in Annex III). Importers will be allowed to request a reduction in the number of certificates corresponding to the carbon price paid by the country of origin for declared emissions. The CBAM authority calculates the price of these certificates as the average of the closing prices of all EU ETS quota auctions conducted on the designated auction platform each calendar week.
The proposal is expected to be implemented in phases from 2023 and fully implemented from 2026. The communication accompanying Fit for 55 explained that CBAM, as an alternative to free allowances under the EU Emissions Trading System, is currently one of the main mechanisms for addressing carbon leakage. CBAM will be implemented gradually, and the free quota that weakens its price signal will be phased out, and a simplified system will be adopted in the first few years. It will ensure that domestic and imported products pay the same carbon price, so it will be non-discriminatory and consistent with WTO rules and other international obligations.
The European Commission is already in place. According to the explanation given in the document, the existing EU emissions trading system allowances are allocated free of charge, and in some cases are indirect emission costs. CBAM is an alternative to these measures, so they must be replaced over time. However, in order to allow manufacturers, importers and traders to adapt to the new system, while gradually implementing CBAM, free quotas should be gradually reduced to ensure that they will not accumulate.
Industry representatives expressed doubts about the proposal and called for the development of an export tax rebate plan, while environmental NGOs are highly skeptical.
Ken Huestebeck is a member of the European Public Policy Practice Department, focusing on energy, environment and health laws and policies.
His current focus is on circular economy policies and related regulations, including design and implementation of publicity and communication strategies.
Ken joined the firm in September 2017. Prior to this, he was a lawyer in the strategic litigation team of a public interest law firm in Brussels and London. There, he successfully managed controversial competition and environmental policy matters in the European upstream power and heat markets,...
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