The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) has emerged as a pivotal tool in the EU’s efforts to combat climate change.
This article summarises what the CBAM is, its purpose, who it applies to, how it shall be introduced, its link to other EU legislation and the possibility of a CBAM being implemented throughout the UK.
What is the Carbon Border Adjustment Mechanism?
The Carbon Border Adjustment Mechanism (CBAM) is a tool developed by the European Union to impose a price on the carbon emitted during the production of carbon intensive products, which are being transported into the EU.
The price imposed on these imported products shall be dependent upon the amount of carbon emitted during the product’s production and the weekly average auction price of the EU Emissions Trading Scheme (EU ETS) allowances (€/tonne of CO2).
Who will the Carbon Border Adjustment Mechanism apply to?
Initially, the CBAM shall apply to imports of hydrogen, iron, steel, aluminium, cement, fertilisers, and electricity.
The scope of the CBAM shall be reviewed and possibly expanded within the future (2026 onwards). More information on this can be found within Figure 1.
How is the Carbon Border Adjustment Mechanism going to be introduced?
To ensure the CBAM has a fair implementation process, the EU has opted to implement the CBAM in phases.
To do this, within August of 2023 the European Commission outlined its methodology within the ‘Implementing Regulation (EU) 2023/1773’ on how to calculate the emissions of imported goods, within the first phase.
The first phase of CBAM is a ‘transitional phase’, which shall run from the 1st of October 2023 to the 31st of December 2025.
Within this transitional phase, importers will only be required to report their emissions, without the financials obligations.
This will pave the way for data collection, consultations, and collaborative discussions with stakeholders and trading partners, ensuring a smooth and fair implementation of the CBAM.
Within 2026, the transitional period shall come to an end and the permanent system shall come into force. However, before the system is fully implemented the European Commission shall have to meet with the European Parliament and European Council around the Regulation’s implementation. Within this meeting the scope of the CBAM shall also be reviewed and possibly expanded.
Figure 1 (below) illustrates a timeline which summarises how the CBAM shall be introduced.
How will the Carbon Border Adjustment Mechanism carbon price be imposed?
The CBAM carbon cost shall be imposed through the following process:
- Importers shall have to declare annually the quantity of goods they have imported into the EU throughout the previous year.
- Importers will then have to calculate the emissions generated by the production of their goods, utilising the methodologies specified within the regulations.
- Importers shall then surrender/purchase digital CBAM certificates which correspond to the emissions they have calculated.
What is the purpose of the Carbon Border Adjustment Mechanism?
The primary purpose of the CBAM is to prevent carbon leakage through ensuring that imported products (specifically those which come from carbon-intensive industries) meet the same environmental standards as those produced within the EU.
What is Carbon Leakage?
Carbon leakage is the situation in which the implementation of climate policies in one country leads to an increase in carbon emissions in another country due to the relocation of carbon-intensive industries to a country with less stringent climate policies.
The Carbon Border Adjustment Mechanism’s overall fit into EU ETS
The CBAM has been designed to be a complementary policy instrument alongside the EU ETS, which shall strengthen the scheme.
One example of this, is that CBAM will aid the transition of phasing out free allowances within the EU ETS for sectors captured within the CBAM scope. It is stated that this ‘phasing out’ shall occur over the next nine years and encompass all sectors which must report under the CBAM.
Can one expect there to be a UK Carbon Border Adjustment Mechanism within the future?
It has been confirmed by the UK Government that one can expect there to be a CBAM implemented throughout the UK by 2027.
The UK Government consulted on the possibility of implementing a CBAM within the consultation ‘Addressing carbon leakage risk to support decarbonisation’, which ran in 2023.
Initially, the CBAM shall be applicable to imported products from the cement, ceramics, fertiliser, glass, hydrogen, iron, and steel sectors.
Further details on how the CBAM shall be designed and delivered will be subject to a consultation in 2024. For more details on the UK CBAM, please click here.
Overall, the CBAM holds great significance in the progress the EU has made towards achieving their climate goals and it is a starting point in ensuring a level playing field for carbon intensive industries worldwide.
If you have any questions about this article, please email info@swanenergy.co.uk or click here to get in touch with the Swan Energy team.
