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Carbon border adjustment mechanism as part of the European Green Deal

In “A European Green Deal”

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In December 2019, the European Commission adopted its Communication on the European Green Deal. The key measures envisaged in this context include the proposal for a carbon border adjustment mechanism (CBAM) for selected sectors, scheduled for 2021. The proposal would aim to ensure that the EU's ambitious climate objectives are not undermined by a relocation of carbon-intensive productions outside the EU.

Preparatory work by the Commission included a March 2020 inception impact assessment. A public consultation took place between 22 July 2020 and 28 October 2020.

In its 2021 Work Programme, the Commission plans to table proposals for a CBAM and a CBAM as an EU own resource in the second quarter of 2021.

Parliament's Committee on the Environment, Public Health and Food Safety (ENVI) prepared an own-initiative report entitled 'Towards a WTO-compatible EU carbon border adjustment mechanism'. On 7 October 2020, the rapporteur Yannick Jadot (Greens/EFA, France) published the draft report. Adopted by ENVI on 5 February 2021, the report called for the introduction of a CBAM as part of a broader EU industrial strategy, with a view to reducing the risk of carbon leakage. On 10 March 2021, Parliament adopted the resolution on a WTO-compatible CBAM.

On 14 July 2021, the Commission adopted its proposal for a CBAM, which would equalise the price of carbon between domestic products and imports in selected sectors.. 

Under the scheme, EU importers would buy carbon certificates corresponding to the carbon price that would have been paid, had the production taken place in the EU. When a non-EU producer has already paid a price for the carbon used in the production in a third country, the EU importer can fully deduct the corresponding cost.

The CBAM would be phased in gradually and would initially apply only to a selected number of goods at high risk of carbon leakage: iron and steel, cement, fertiliser, aluminium, and electricity generation. Over the 2023-2025 period, a simplified system would be in force, implying reporting obligations on the emissions embedded in relevant imports.

As from 2026, EU importers would start paying a financial adjustment by surrendering the amount of CBAM certificates that correspond to the emissions embedded in their imports. Correspondingly, under the intertwined proposal for the revision of the EU's Emissions Trading System (ETS), the free allowances under the ETS would gradually be phased out for the CBAM sectors as from 2026.

In September 2021, the CBAM proposal was referred to the Parliament's ENVI Committee and MEP Mohammed Chahim (S&D, Netherlands) was appointed rapporteur. The Committees for opinion are INTA, BUDG, ECON, ITRE and IMCO.

The ENVI committee adopted a report on 17 May 2022. At the June I plenary, the parliament referred the report, ahead of the votes on the amendments, back to the Committee, which in turn voted to place the report on the June II part-session. On 22 June 2022, the Parliament adopted its position on the regulation, with 450 votes for, 115 against and 55 abstentions. It foresees the phasing in of the CBAM from 2027 with free allowances ending in EU emissions trading system by 2032. It supports a broadening of the scope to include organic chemicals, plastics, hydrogen and ammonia as well as indirect emissions. It also supports the need for a centralised EU CBAM authority and mentions that revenue from CBAM shall accrue to the EU budget and be reflected in an increased support to least developed countries decarbonisation efforts.

The European Economic and Social Committee (EESC), adopted its opinion on the proposal on 8 December 2021, welcoming the proposal and calling for the extension of the impact assessment to export activities within the covered sectors. Furthermore, EESC's opinion is in favour of supporting the industrial transition of the affected sectors through directly allocating revenue from the CBAM. The EESC expects the Commission to address the possible effects of the CBAM through the value chain by means of an impact study.

On 15 March 2022 the Council adopted its general approach on the CBAM, introducing changes to the CBAM governance, in comparison to the Commission's proposal, by means of greater centralisation, e.g. an EU level centralised registry of CBAM declarants (importers). Furthermore, it foresees a minimum threshold exempting consignments with a value of less than €150 from CBAM obligations. In addition, it suggests the establishment of a 'climate club' through an alliance of countries which have in place carbon pricing instruments or other comparable instruments.

The Committee of the Regions adopted an opinion entitled 'Making ETS and CBAM work for EU cities and regions' (rapporteur: Peter Kurz, PES, Germany). It supports the introduction of CBAM as a means to address carbon leakage and to encourage global climate action.

The trilogue meetings on the file begun on 11 July 2022, and on 12 December 2022 a provisional political agreement was reached. The agreed text sets the transitional period from 1 October 2023 to 31 December 2025, with full implementation from 1 January 2026. The CBAM will cover a wider range of products (cement, electricity, fertilisers, iron and steel, aluminium and hydrogen) than those brought forward by the Commission. The EU ETS's free emission allowances are to be replaced by the CBAM, this is to occur from 2026 and 2034. The rate of reduction is as follows: 2026: 2.5%; 2027: 5%; 2028: 10%; 2029: 22.5%; 2030: 48.5%; 2031: 61%; 2032: 73.5%; 2033: 86%; 2034: 100%).

The provisionally agreed text was endorsed by the Committee of the Permanent Representatives of the Governments of the Member States to the EU on 20 December 2022 and by the ENVI committee on 9 February 2023. On 18 April 2023 the file was voted in plenary with 487 votes in favour, 81 against and 75 abstentions. The final act was signed on 10 May 2023 and published in the Official Journal on 16 May 2023. 

References:

Further reading:

Author: Henrique Simões, legislative-train@europarl.europa.eu

As of 20/03/2024.