Carbon Border Adjustment Mechanism (CBAM): carbon price on imported products coming from outside EU

If you are following our daily posts, yesterday - December 13 - a topic for another important one: deal was reached at the European Parliament on the Carbon Border Adjustment Mechanism (CBAM)

The CBAM is set up to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods. And as such, to mitigate the so-called ‘carbon leakage' risk – i.e. companies based in the EU could move carbon-intensive production abroad to take advantage of lax standards, or EU products could be replaced by more carbon-intensive imports.

The CBAM, designed in compliance with World Trade Organization (WTO) rules, will work as follows: EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in € / tonne of CO2 emitted. Importers will have to register with national authorities. They will also be responsible for all verifications, incluiding yearly declarations. And for selling CBAM certificates to importers (!)

It is expected that the CBAM will encourage producers in non-EU countries to green their production processes. In other words, only countries with the same climate ambition as the EU will be able to export to the EU without buying CBAM certificates.

Sectors within the initial scope of these new CBAM rules are some of the most carbon-intensive ones, basically iron and steel, cement, fertilisers, aluminium, electricity and hydrogen.

CBAM will apply from 1 October 2023 but with a transition period where the obligations of the importer shall be limited to reporting, with the aim to collect data. By the end of 2027, the impacts of CBAM on imports from developing and less developed countries will be evaluated.

This new bill will be the first of its kind. Click on the image below (from KNOEMA) to read more, Press Release from the European Parliament.

Through CBAM, would EU be catalizing the transition to a global low-carbon economy ? What do you think it will happen in the short, mid and long terms ?