Prоvisional agreement on Carbon Border Adjustment Mechanism (CBAM)

Overview of CBAM initiative

On 14 July 2021 the European Commission presented the so called “Fit for 55” legislative package. The package comprises thirteen interlinked regulatory proposals aimed at achieving the goals of the Green Deal for 55% reduction of emissions by 2030 (in comparison with the levels from 1990) and for climate-neutral Europe by 2050. Among the main initiatives in the package is the introduction of CBAM.

The purpose of this mechanism is to prevent "carbon leakage" through the introduction of a carbon tax on certain goods imported into the EU. It aims to reduce the possibility for European companies from carbon-intensive sectors to relocate their production to third countries with lower product standards and/or to replace European products with imported ones resulting from carbon-intensive production processes. In addition, it is expected that CBAM will encourage third countries to adapt their climate policies to standards similar to those in the EU.

New developments

Compared to the original proposal, the agreement includes some key developments, inter alia, including:

• Timeframe: the new regime will apply from 1 October 2023 (instead of 1 January 2023) with additionally determined transitional period for phasing-out of the free allowances
  
• Scope: the mechanism will be extended to hydrogen and some downstream products from iron and steel
• Governance: the governance of the regime will be performed by the European Commission.

Main aspects regarding CBAM framework

CBAM will enter into force in 2023 by including a transition period and will apply to imports of goods defined by their tariff codes and falling into the following categories:

• Cement
• Aluminum
• Iron and steel including downstream products (screws, bolts)
• Fertilizers
• Electricity
• Hydrogen.

The CBAM scope will be re-evaluated before the end of the transition period and may be extended to include additional product categories such as organic chemicals and polymers. The overall aim, by 2030, is to cover all commodities currently in the scope of the EU emissions trading system (e. g. mineral oil products, lime, glass, ceramics, pulp, paper, cardboard, acids, organic chemicals).

The CBAM charges will be calculated based on “embedded” emissions which generally occur during manufacturing as well as indirect emissions under other conditions. The payments of CBAM charges will be facilitated through the purchase and surrender of CBAM certificates which will not be traded on the EU emissions trading market. The proposal includes initial program for free allowances applied to CBAM which will be gradually reduced from 2027 and completely phased out until 2032.

Impact on businesses

From an operational perspective and in terms of strategic decision-making, CBAM will directly and indirectly impact businesses both in the EU and across the globe.

For this reason, Bulgarian businesses should preferably consider a holistic approach across their value and supply chains. The introduction of the new tax will affect not only local industries that directly import products covered by CBAM but also companies along the supply chain.

Exemplary initial steps on behalf of businesses may include: (i) assigning internal responsibility for management of the regime; (ii) reviewing the footprint of the imported products; (iii) initiation of new administrative processes.