SynopsisThe Carbon Border Adjustment Mechanism initiated its transitional phase on October 1, 2023, marking a vital step in the EU Green Deal's execution. This phase aims to assess CBAM's effectiveness in preventing carbon leakage from carbon-intensive industries in Europe, such as steel, to countries with laxer climate regulations. The European Steel Association emphasizes the significance of a successful CBAM, particularly in light of global steel overcapacity and the need for a Global Arrangement on Sustainable Steel.Article:The commencement of the Carbon Border Adjustment Mechanism's (CBAM) transitional period on October 1, 2023, signifies a pivotal milestone in the implementation of the EU Green Deal. During this initial phase of CBAM, which involves simplified monitoring and reporting, the focus is squarely on evaluating its effectiveness in preventing carbon leakage from European industrial sectors, including steel, to countries that continue to invest in carbon-intensive technologies.The European Steel Association underscores the importance of this phase, particularly in light of the carbon pricing burden that the EU steel industry has borne for several years. Imports of steel from third countries, which typically carry a significantly higher carbon footprint, have enjoyed exemptions thus far. Axel Eggert, Director General of the European Steel Association (EUROFER), commented on the significance of CBAM: "We welcome the start of the CBAM test phase and expect that an effective carbon price will be introduced at the EU border in 2026 to level the playing field."Eggert also highlighted the urgency of ensuring the success of numerous EU steel decarbonization projects. The global steel industry currently faces over 600 million tonnes of excess capacity, more than four times the EU's annual steel production. To address this, he stressed the need for an effective Global Arrangement on Sustainable Steel resulting from the upcoming meeting between Commission President Ursula von der Leyen and U.S. President Joe Biden on October 20. Such an arrangement would establish trade solutions to reduce excess capacity and achieve global steel industry decarbonization by 2050.The CBAM's initial phase will evaluate its effectiveness against carbon leakage to countries without equivalent climate legislation or carbon costs. This includes setting sufficiently high default values to incentivize accurate reporting by importers of high-pollution products. Timely checks and penalties are crucial to combat circumvention practices in complex sectors like steel. Addressing carbon leakage extends throughout the entire value chain and across global markets to preserve the competitiveness of European exports.Starting from October 1, importers must report quarterly on emissions embedded in steel, aluminium, cement, fertilizers, hydrogen, and electricity imported to the EU. The first reports, covering the last quarter of 2023, are due by the end of January 2024. Levy payments on emissions will commence in 2026.While CBAM monitoring and reporting rules are largely modeled on the EU Emissions Trading System (ETS), flexibility has been provided for the first three quarterly reports until mid-2024. Importers can use default values or monitoring methods from their respective countries and revise their reports until July 2024. Successful implementation hinges on constructive cooperation among all actors in the value chain, thorough rule checking, and data collection.ConclusionThe launch of CBAM's transitional phase is a pivotal moment in the EU's quest for greener industry practices. As it navigates the complexities of carbon pricing and carbon leakage prevention, the steel industry stands at a crossroads. The success of CBAM and the broader goal of sustainable steel production require international collaboration and comprehensive strategies to address overcapacity and achieve global decarbonization targets.