Regulatory Overview of CBAM

CBAM

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The Carbon Border Adjustment Mechanism (CBAM) is a carbon tariff on carbon intensive products imported by the EU (1). It is part of the European Green Deal mentioned earlier. Its goal is to avoid carbon leakage, meaning that emissions reduction efforts of the EU are offset by increasing emissions outside the EU through relocation of production or increased imports of less carbon-intensive products. A common carbon pricing would ensure a level playing field for businesses.

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The mechanism applies to importers of products in six carbon intensive sectors, namely aluminum, cement, iron and steel, electricity, hydrogen and fertilizers. Which emissions need to be included and how they are calculated depends on the type of product (see table). There is a distinction between simple goods which require exclusively input materials and fuels and complex goods which have embedded emissions. For complex goods, it is necessary to also account for the embedded emissions of input materials (precursors) consumed during production.

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The mechanism came into force in October 2023. There is a transition phase until 2026 during which emissions reporting is required without the need to purchase certificates. The goal is for this to serve as a learning period for all stakeholders and refine the policy. From 2026, the reported emissions also need to be verified by an accredited verifier.

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(2) 

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CBAM is built on the European Trading Scheme (ETS) and will subject covered imports to the same carbon price imposed on internal producers under the EU ETS. However, importers can deduct any carbon price paid in the country of origin from the CBAM certificates they have to purchase.

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From 2026 to 2034, free allowances under the ETS granted to EU manufacturers will be phased out. So far, most of the industrial emissions were covered by free allowances to avoid carbon leakage which will no longer be necessary under CBAM (3).

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Sources

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1 https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

2 https://taxation-customs.ec.europa.eu/system/files/2023-07/20230714%20Q%26A%20CBAM_0.pdf

3 https://taxation-customs.ec.europa.eu/system/files/2023-07/20230714%20Q%26A%20CBAM_0.pdf

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