On Tuesday, December 13, the European Parliament and the European Council reached a provisional agreement to set up an EU Carbon Border Adjustment Mechanism (CBAM) to fight climate change and prevent carbon leakage. With this agreement, the parties aim to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the price for imported goods, by compelling companies that import in the EU to get CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.
The law will encourage non-EU countries to pay more attention to the climate issue and the countries with same climate attitudes as the EU will not have to buy CBAM certificates. The new bill is designed to be in full compliance with World Trade Organisation (WTO) rules and will apply from October 1, 2023, though it will have a transition period where the obligations of the importer will only be reporting. The length of the transition period and the full phasing-in of the CBAM will be linked to the phasing-out of the free allowances under the ETS and this will be negotiated later this week.
According to the proposal of the Commission, besides some downstream products, the CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, and will be extended to hydrogen and indirect emissions under certain conditions. With the aim of including all goods covered by the ETS by 2030, the Commission will assess whether to extend the scope to other goods at risk of carbon leakage before the end of the transition period. And by the end of 2027, the Commission will do a complete review of the CBAM including an assessment of progress made in international negotiations on climate change, as well as the impact on imports from developing countries.