The EU Commission has announced a package of measures to enable the trading bloc to meet its 55% greenhouse gas emission reduction target that it has set itself for 2030.
Within the package we have confirmation of the proposed Carbon Border Adjustment Mechanism (“CBAM”), details of which were leaked in May.
The scheme is largely as set out in the leaked documents, with one important exception regarding the transitional arrangements.
The CBAM will commence in 2023 and apply to the importation of electricity and certain goods into the EU Customs Union. The goods covered are aluminium, cement, fertilizers, iron and steel. It is tempting to think that the CBAM will only apply to construction and heavy industry but the inclusion of aluminium means that it will also apply, for example, to supermarkets which use aluminium foil and to brewers who utilise aluminium for cans.
When the CBAM is fully implemented in 2026 importers, who are duly authorised to import these goods by the CBAM Authority, will be required to make a return of the goods imported and the embedded emissions within the goods. The embedded emissions will determine the number of CBAM certificates the importer has to surrender. The CBAM certificates can be purchased by the importer and will be priced by reference to the weekly average closing carbon price under the EU Emissions Trading Scheme. The regulations make provision for any carbon price borne on emissions associated with the production of the goods in the country of origin to be offset in order to determine the number of CBAM certificates that are required.
Once fully implemented the scheme is based on actual embedded emissions within the goods to be imported, where such emissions have been calculated and verified by a duly authorised verifier. In the absence of sufficient information and verification default emissions for each type of good can be used, based on the worst 10% of emitters in the EU who produce similar goods.
In the initial three-year period of the scheme, the transitional period from 2023 to 2025, the importer will have a requirement to disclose the embedded emissions in the goods but, in contrast to the provision in the leaked documents, there will be no payment required to be made in respect of the CBAM.
Clearly the scheme will create complexities for companies supply chains, and impose additional costs both in administration and in the underlying carbon price.
The leaked CBAM proposals attracted some international comment including accusations that the EU is introducing a form of protectionism. There is likely to be considerably more comment now that the actual proposed framework for the CBAM has been released. The US reacted to the leaked documents by saying it wanted to examine the proposals and determine what its response should be and hasn’t ruled out retaliatory measures.
The developing countries that have significant exports to the EU are concerned about the effect that CBAM will have on their competitiveness and at a minimum will be trying to ensure that the revenues the EU raises from the measure are used to assist these countries to decarbonise. In the absence of that kind of support from the EU, many countries will have to consider their own Emissions Trading Scheme or Carbon Tax so at least they receive the benefits of the carbon price linked to goods that they produce, rather than see the levy simply being paid to the EU.