Glossary > #CBAM

CBAM – Commission Implementing Regulation (EU) No. 2023/1773

Carbon Border Adjustment Mechanism (CBAM) is a pioneering policy of the European Union (EU) aimed at combating climate change, addressing the problem of carbon leakage, and ensuring fair economic competition between domestic and international industrial sectors. CBAM introduces a carbon price on imports of specific products into the EU to reflect the carbon costs borne by EU manufacturers under the EU Emissions Trading System (ETS). This mechanism is a key step in promoting sustainable industrial production globally and aligning international trade practices with the EU’s ambitious climate goals.

CBAM is governed by Regulation (EU) 2023/956, which establishes the overall framework, and Commission Implementing Regulation (EU) 2023/1773, which specifies detailed reporting requirements during the transitional phase. As a significant part of the EU’s “Fit for 55” initiative, CBAM aims to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels and achieve climate neutrality by 2050.

Key Objectives of CBAM

CBAM is designed to achieve several fundamental objectives:

  1. Preventing Carbon Leakage: By introducing equivalent carbon costs on imports, CBAM reduces the risk of carbon leakage, where companies relocate production to countries with less stringent climate regulations.
  2. Promoting Cleaner Production: CBAM incentivizes non-EU manufacturers to adopt sustainable production methods by charging for carbon emissions contained in imports.
  3. Equalizing Carbon Costs: CBAM ensures that carbon-intensive imports bear the same costs as domestic products under the EU ETS system, thereby supporting fair market competition.
  4. Strengthening EU Climate Leadership: CBAM exemplifies the EU’s commitment to leading global climate action and encourages other countries to implement similar measures.

How CBAM Works

1. Scope of CBAM

CBAM applies to imports of carbon-intensive products that are exposed to a high risk of carbon leakage. Initially, the mechanism includes:

  • Iron and steel
  • Cement
  • Aluminum
  • Fertilizers
  • Hydrogen
  • Electricity

These sectors were selected due to their significant carbon intensity and contribution to global emissions.

2. Gradual Implementation

CBAM is implemented gradually to ensure a smooth transition for all stakeholders:

  • Transitional Phase (2023–2025): Importers must report emissions contained in their products without financial impacts. This phase serves as a preparatory and learning period.
  • Definitive Phase (from 2026): Importers will be required to purchase and surrender CBAM certificates corresponding to the emissions contained in their imports.

3. CBAM Certificates

During the definitive phase, importers in the EU will:

  • Purchase CBAM certificates, whose prices will be derived from the average weekly auction price of EU ETS emission allowances (€/t CO2).
  • Annually declare and surrender certificates corresponding to the emissions contained in their imports.

If carbon pricing was already paid in the exporting country, an equivalent amount may be deducted from the CBAM obligation.

Role of Commission Implementing Regulation (EU) 2023/1773

Commission Implementing Regulation (EU) 2023/1773 specifies the operational details of CBAM during its transitional phase, including:

1. Methodologies for Reporting Emissions

Importers must report emissions contained in their imports using:

  • Actual Emissions Data: Verified emissions from production.
  • Default Values: Provided by the European Commission for cases where actual data is not available.
  • Estimated Values: Permitted under specific conditions during the transitional phase.

2. Transitional CBAM Registry

This platform ensures:

  • Registration of importers and declarants.
  • Submission of quarterly CBAM reports.
  • Communication with the European Commission, national authorities, and economic operators.

3. Compliance and Sanctions

National authorities will monitor reports for accuracy and completeness. Sanctions may be imposed for non-compliance, with severity depending on the extent of the violation.

Benefits of CBAM

  1. Environmental Impact: CBAM contributes to EU climate goals by reducing global carbon emissions.
  2. Economic Fairness: CBAM supports fair competition by equalizing carbon costs between EU and non-EU manufacturers.
  3. Global Influence: CBAM sets a precedent for the adoption of similar climate initiatives in other regions.

Challenges and Criticism

  1. Complexity: Detailed reporting and compliance requirements may present challenges for businesses, particularly for small importers.
  2. WTO Compliance: Concerns have been raised about CBAM’s compliance with World Trade Organization (WTO) rules, particularly regarding non-discrimination.
  3. Impact on Developing Countries: CBAM could disproportionately affect exporters from developing countries, which may lack sufficient resources for effective decarbonization.

Frequently Asked Questions (FAQs)

1. When did CBAM come into force?

CBAM entered the transitional phase on October 1, 2023, with the first reports due by January 31, 2024.

2. What goods does CBAM apply to?

CBAM initially applies to imports of cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity.

3. Are sanctions imposed for non-compliance?

Yes, sanctions may be imposed for incorrect or incomplete reports. The amount of sanctions is determined by member states taking into account the severity of the violation and the declarant’s cooperation.

4. How does CBAM work with the EU ETS system?

CBAM complements the EU ETS by introducing a similar mechanism for charging carbon emissions on imports. The gradual reduction of free allowances under the EU ETS is aligned with the implementation of CBAM.

5. What is the role of CBAM certificates?

From 2026, importers will purchase CBAM certificates to cover emissions contained in their imports. Certificate prices will be derived from the price of EU ETS allowances.

Conclusion

The Carbon Border Adjustment Mechanism represents a groundbreaking approach to global climate policy that addresses carbon leakage and promotes international competitiveness. By equalizing carbon costs and promoting sustainable production methods, CBAM strengthens the EU’s position as a global climate leader. Commission Implementing Regulation (EU) 2023/1773 ensures a smooth transition to the definitive CBAM regime, thereby balancing environmental objectives with economic considerations.