How will Carbon Border Adjustment Mechanism (CABM) be implemented
In its ‘Fit for 55 programme’, the EU has committed to achieving carbon neutrality by 2050 and for a 50% reduction in CO2 emissions by 2030.
Given moving towards carbon neutrality means ever more stringent controls and measures being introduced in the EU, there is concern about ‘carbon leakage’. The carbon leakage concept can be explained as purchase of products with a high energy input from jurisdictions with less rigorous CO2 emission reduction programmes than the EU. In such a scenario, an industrial process which emits a lot of carbon may be moved from the EU to a jurisdiction whose environmental laws have not been developed in order to avoid expensive EU penalties. Furthermore, without CBAM measures in place, imports from jurisdictions with less onerous environmental standards could be produced more cheaply and would have a competitive advantage in the EU market. Thus, the benefit of the environmental measures being introduced in the EU would be greatly undermined.
The CBAM would apply additional import charges that take account of embedded CO2 emission levels when certain goods are imported into the EU from a 3rd country.
Originally, it was envisaged that the CBAM measures would apply to iron/steel, aluminium, fertilisers, electricity, and cement, but the EU Parliament is now seeking to further extend the scope of CBAM to include other products and this is currently being discussed.
How will CBAM be implemented?
The CBAM will be based on a system of certificates to cover the embedded emissions in imported products. The CBAM certificate price will be based on the EU Emission Trading Scheme allowance price. For the sectors that will be covered by CBAM, the free ETS allowances will gradually be phased out from 2026.
At present, CBAM is still being discussed at EU level and details as to how it would be applied at national level are yet to be set out.
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