- On 16 May 2023, regulations for revising the European Union Emission Trading System (EU ETS) and the new EU Carbon Border Adjustment Mechanism (CBAM) were published in the Official Journal of the European Union.
- A transitional period will apply for EU CBAM from 1 October 2023 to 31 December 2025, with solely quarterly reporting obligations; from 2026 onward, purchasing CBAM certificates will be required.
- The EU ETS will be extended in the aviation and maritime sectors; new ETS II will cover fuels for transportation and heating.
- Free allowances under the EU ETS will be phased out starting in 2026.
- Businesses (EU and non-EU) are advised to assess the potential impact and prepare for new CBAM reporting obligations starting later this year.
Executive summary
On 16 May 2023, a significant milestone was passed as legal regulations for European Union Emission Trading System (EU ETS) reform and the new EU Carbon Border Adjustment Mechanism (CBAM) were published in the Official Journal of the EU.
The EU's "Fit for 55" legislative package, which was initially announced in July 2021 and includes the new CBAM and ETS reform, is viewed as a key enabler for helping Europe reduce emissions at least 55% by 2030 (from 1990 levels). These targets are set out in the European Climate Law and are part of the wider European Green Deal strategy to achieve climate neutrality by 2050.
A transitional period for CBAM will begin 1 October 2023 and extend through 2025, during which time quarterly emissions reporting will be required. Affected businesses will need to get ready to comply with new compliance and reporting requirements starting later this year and begin to assess the medium- to long-term process and cost implications.
Key principles of CBAM
The EU CBAM is a climate measure that aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic (EU) production that is subject to carbon costs under the EU ETS. While the EU ETS applies to installations based in the EU and to certain production processes and activities (and will be extended further, as detailed below), CBAM will apply to certain goods imported into the EU.
Scope of goods covered
CBAM will cover the following product categories:
- Kaolin and other kaolinic clays, calcined
- Cement, aluminous cement, cement clinkers, etc.
- Fertilizers (e.g., ammonia, nitric acid, sulphonitric acids)
- Agglomerated iron ores and concentrates
- Comprehensive coverage of iron and steel products (except some ferro-alloys, scrap etc.)
- The iron and steel products include downstream products, such as screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles
- Aluminum structures and parts of structures
- Certain aluminum reservoirs, tanks, vats, containers
- Stranded wire, cables, plaited bands and the like, made of aluminum, not electrically insulated
- Other articles of aluminum
- Hydrogen
- Electrical energy
This product list has significantly increased compared to initial draft versions of the regulation; for example, downstream products are now included, not just raw and semi-finished materials. Therefore, the list will apply to a larger number of businesses.
Political discussions seem to favor extending CBAM further by 2030, to cover all product categories that are subject to the EU ETS if these products were manufactured in the EU. This would include polymers, diverse chemicals, mineral oil products, paper and pulp, among other categories.
Transition period: 1 October 2023 to 31 December 2025
Between 1 October 2023 and 31 December 2025, transitional provisions will apply. Quarterly emissions reporting will be required and purchasing CBAM certificates will be optional. Importers (customs declarants, indirect representatives) will be required to quarterly report embedded emissions in goods imported during that quarter of the calendar year, detailing direct and indirect emissions as well as any carbon price effectively paid in a third country.
Notably, from 31 December 2024, importers must have "authorized CBAM declarant" status to qualify for the import of in-scope goods.
How it will work
Under new CBAM rules, importers are required to report total verified greenhouse gas (GHG) emissions embedded in goods imported in a given calendar year. Following the transitional period (at the end of 2025), the financial impact of CBAM will gradually increase, with a progressive phase-in of CBAM costs until 2034. Carbon cost paid at origin can be deducted from the payable CBAM charges (provided that evidence of the cost can be made available).
Payment of CBAM charges will be facilitated through the purchase and surrender of CBAM certificates, which will be priced at the weekly averages of EU ETS allowances auctions.
During the calendar year, the importer must ensure that the number of CBAM certificates in its CBAM registry account at the end of each quarter corresponds to at least 80% of the embedded emissions in imported products since the beginning of the calendar year. The importer must surrender CBAM certificates in the exact number corresponding to emissions embedded in goods imported in the calendar year, in addition to submitting an annual CBAM declaration.
Definition of embedded emissions
CBAM charges correspond to embedded emissions in the named product categories, and the definition of embedded emissions to be declared has been extended to indirect emissions. The declaration of emissions can be made based on actual emissions, which need to be determined based on a schema provided by the EU regulators, although the details are not yet finalized. Implementing legal acts containing additional details are likely to be published in Summer 2023.
If actual emissions are declared, they must be accredited by independent verifiers. If no actual emissions are available, standard "default" values will be used that reflect average emissions for a certain product manufactured in a specific country or region. If no reliable data to determine these standard values is available, the EU Commission will determine default values based on the worst-performing EU installations. Further guidance is expected in the implementing acts in Summer 2023.
Exemptions and extended circumvention practices
CBAM will not apply to goods of nonpreferential origin in Switzerland, Liechtenstein, Iceland and Norway. There are only a small number of exemptions, including for low-value consignments up to €150 and certain military imports.
Examples of circumvention practices have been slightly extended in what is now an open catalogue of practices that may consist of, but are not limited to:
- Slight modification of goods to change Combined Nomenclature classification
- Artificial split of shipments to benefit from CBAM exceptions described above
Key changes to the EU ETS
One significant change to the current system is the phase-out of free allowances. Effectively, from 2026 to 2034, the free allowances granted to EU manufacturers will fade on a progressive curve, consequently increasing the cost of manufacturing for businesses if processes remain the same.
The following phase-out rates for free allowances will apply: