Explaining the new Carbon Border Adjustment Mechanisum (CBAM)

The European Union is committed to reducing their economy-wide net greenhouse gas emissions by at least 55 % compared to 1990 level by 2030. The EU Emissions Trading Scheme (EU ETS 1) delivers harmonised pricing of greenhouse gas emissions for energy-intensive sectorsin EU Member States, Norway, Iceland,and Liechtenstein. The price signal has been weakened by the current measures to avoid carbon leakage, i.e. the relocation of production to third countries for reasons of costs related to EU climate policies. The carbon border adjustment mechanism (CBAM) seeks to replace those measures.

The CBAM shallensure that imported goods into the EU and goods produced within the EUface the same cost of carbon. Producers of goods with lower specific emissions have an advantage over producers causing more emissions in the production process. Operators within the EU report yearly the emissions of their installations since the introduction of the EU ETS 1 in 2005. Starting now, importers mustreport theemissions related to the production of the imported goods (embedded emissions) upon importation. EU producers already now need to surrender EU allowances to offset their emissions; they can buy the allowances at auctions or from other market participants and receive some allowances for free. Importers will from 2026 onwards needtosurrender CBAM allowancesto offset embedded emissions in imported goods, too. As long as EU producers receive free allocation, only part of the embedded emissions need to be offset by importers, too. The surrendering obligation is reduced to reflect the carbon price effectively paid in the country of origin, if applicable.

The CBAM covers only goods from certain sectors. Hydrogen,ammonia,and green steel are PtX products covered by the CBAM regulation, e-fuels are not. Importers of CBAM products mustreport on the emissions associated to the production of those goods. The first reports are due by 31 January 2024 covering the last quarter of the year 2023. The importers rely on information provided by the producers of the good.

As the CBAM is a new instrument and requires monitoring and reporting data from operators not covered by the EU ETS 1 so far, it starts with a transitional phase up to the end of 2025. In this phase,simplified monitoring rules apply; external verification is suspended and no CBAM allowances mustbe surrendered. From 2026 onwards, the surrendering requirementwill be introduced gradually while the free allocation to EU producers will be reduced at the same pace. This is to ensure that goods produced in the EU are in no case treated more favourable compared to goods imported into the EU.