Policy Pulse – 21 October 2021 – George Anjaparidze
The proposed EU Carbon Border Adjustment Mechanism is largely targeted at heavy industry.
In 2019, the imports in targeted sectors were equal to €53 billion, of which 90% was aluminum, iron and steel.
55% of targeted EU imports originated from Russia, China, Turkey, Ukraine, and India in 2019.
The European Union plans to introduce a Carbon Border Adjustment Mechanism (CBAM) on imports with high carbon intensity. The proposed regulation is targeted towards imports of products in the cement, electricity, fertilizer, iron and steel and aluminum sectors. Notably not all products in these sectors are targeted in the first phase, for example ferro-alloys and ferrous waste are excluded from the iron and steel sector, but the scope of sectors and gases covered by the proposed regulation may increase over time. In 2019, the imports in targeted sectors were equal to €53 billion, of which 90% was aluminum, iron and steel (see chart above).
The top 30 exporters (see chart above) are geographically diverse and at different stages of development. The majority (55%) of EU imports targeted by CBAM originated from Russia, China, Turkey, Ukraine and India in 2019.
The scheme is set to come into effect on 1 January 2023. However, in the initial “transition” period (up to 31 December 2025) there is only a requirement to report on greenhouse gas emissions. The requirement for importers to purchase CBAM certificates is envisioned to start in January 2026.
Importers are required to report the direct and where relevant also indirect greenhouse gas emissions of products they import. The methods used to estimate emissions and gases covered are outlined in the relevant annexes of the proposed regulation. The reporting is to be made based on actual emissions incurred but default values may also be applied when data gaps exist.
Producers can reduce the number of CBAM certificates required for purchase by importers in two ways (i) reduce the direct and where relevant indirect greenhouse gas emissions of their products (ii) help the importing entity demonstrate that a carbon price has been paid in the country of origin and deduct the commensurate amount from the CBAM certificate requirements. Furthermore, the EU may conclude agreements with third countries that take into account carbon pricing mechanisms through their domestic actions.
The CBAM aims to level the playing field between domestic producers and importers of greenhouse gas intensive products. Conceptually, the CBAM proposal is similar to EU’s past efforts to incorporate international aviation into its Emission Trading System (ETS). However, in the case of international aviation a multilateral agreement was designed to ensure a level playing field for all airlines and this stopped the clock on incorporating international aviation into the EU ETS.
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