Carbon Border Adjustment Mechanism (CBAM).
Joint Report of the International Trade & Customs and Environmental Law & Climate Change Departments | Carbon Border Adjustment Mechanism (CBAM)
On May 10th, 2023, the Council of the European Union and the European Parliament approved Regulation 2023/956 implementing the Carbon Border Adjustment Mechanism (commonly known as “CBAM”) to avoid the risk of carbon leakage, thereby reducing global carbon emissions and supporting the objectives of the Paris Agreement. It originated in the context of the “Fitfor55” legislative package, which aims to ensure that EU policies are in line with the climate objectives agreed by the Council and the European Parliament. The term “Objective 55” refers to the target of reducing greenhouse gas (GHG) emissions by at least 55% that the EU has set itself for 2030.
CBAM mainly aims to protect European producers by making importers pay for the emissions contained in certain products and thus prevent carbon leakage. Basically, carbon leakage occurs when the production of carbon-intensive goods is offshored to non-EU countries due to differences in carbon prices or less ambitious climate policies, or when products manufactured in the EU are replaced by carbon-intensive imports.
With these objectives in mind, through the CBAM a mechanism has been established that will force importers (registered in the EU) of certain goods originating in third countries (extra EU and extra EFTA) to purchase certificates equivalent to the carbon price they would have paid if those same goods had been produced within the EU, in accordance with the “European Union Emissions Trading System” (ETS). In this way, the CBAM will ensure that the carbon price of imports will be equivalent to the carbon price of production within the EU.
Where a carbon price has been paid in the country of origin in respect of the GHG emissions embedded in the goods, the authorized declarant could claim a reduction in the number of certificates to be surrendered equal to the carbon price already paid in the third country. This only applies to the extent that the carbon price is not reimbursed or offset, and a separate certification will be required. The Commission is expected to adopt a set of rules to determine how this reduction will be applied.
Initially, the Regulation provides for a transitional phase in which the CBAM will only apply to a limited universe of goods whose production is carbon intensive and which present higher risks of carbon leakage. These products are iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen. The CBAM is expected to cover more than 50% of the emissions of the sectors covered by the ETS. By 2026, CBAM is expected to be extended to chemicals and polymers and, by 2030, all products covered by the ETS should be covered by CBAM. The CBAM will apply to direct GHG emissions emitted during the production process of the identified goods.
The CBAM entered into force on the day following its publication in the Official Journal of the EU on May 16th, 2023. However, its implementation will occur gradually. The first transition phase will begin on October 1st, 2023, and end on December 31st, 2025. During this phase, importers of goods covered by the CBAM will be required to report greenhouse gas emissions caused directly or indirectly by their imports, without any obligation to make any payments or adjustments.
The second stage will begin on January 1st, 2026. Thereafter, importers will have to declare annually every May 31st the number of goods imported into the EU and their greenhouse gas emissions. In addition, importers will be required to submit a corresponding number of CBAM certificates depending on the amount of greenhouse gases associated with the imported goods. The price of the certificates will be calculated on the basis of the weekly value of CO2 emission allowances in the ETS.
In the event that an imported product has been subject to the payment of a price for the carbon generated during its production, the CBAM allows importers to deduct the amount paid from the total amount of certificates to be redeemed.
Please, do not hesitate to contact us should you require any further information on this matter.
Sincerely,
Manuel Frávega
Augusto Vechio
Agustín Perrino