CBAM Regulation: A Landmark Tool for Tackling Carbon Leakage

As the global community grapples with the daunting challenge of climate change, the European Union has
Image Name – CBAM
Image Name – CBAM Image Source – EU

As the global community grapples with the daunting challenge of climate change, the European Union has taken a significant step forward in combating carbon leakage. On 10 May 2023, the co-legislators signed the Carbon Border Adjustment Mechanism Regulation, marking a crucial milestone in the EU's fight against carbon-intensive imports.

The CBAM Regulation officially entered into force on 16 May 2023, following its publication in the Official Journal of the EU. The CBAM itself will be implemented in a transitional phase starting from 1 October 2023, with importers required to report their emissions by 31 January 2024.

The precise rules and requirements for emissions reporting will be specified in an implementing act, formulated in consultation with the CBAM Committee comprising experts from EU Member States.

The core objective of the CBAM is to address the issue of carbon leakage, which occurs when EU-based companies relocate carbon-intensive production to countries with less stringent climate policies or when carbon-intensive imports replace EU products.

To tackle this problem head-on, the CBAM aims to assign a fair price to the carbon emissions associated with the production of carbon-intensive goods entering the EU. This will not only incentivize cleaner industrial production in non-EU countries but also align with the EU's ambitious climate goals.

The CBAM's scope initially encompasses imports of cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. These sectors, known for their carbon-intensive nature, face the highest risk of carbon leakage. However, as the CBAM gradually takes effect, it is projected to cover over 50% of emissions in sectors regulated by the EU Emissions Trading System. Importers falling within the CBAM's purview will initially report their greenhouse gas emissions, without any financial obligations, during the transitional phase.

Starting from 1 January 2026, importers will be required to declare their annual imports and the corresponding embedded greenhouse gas emissions. They will then surrender the appropriate number of CBAM certificates, the price of which will be determined based on the weekly average auction price of EU ETS allowances. This phased approach aligns with the gradual phase-out of free allowances under the EU ETS, ensuring a smooth transition for businesses and public authorities alike.

While the CBAM undergoes its transitional phase, a comprehensive review of its functionality will take place, along with an assessment of its product scope. The inclusion of additional goods produced in sectors covered by the EU ETS will be considered, allowing for the potential expansion of the CBAM mechanism. This review will be concluded before the definitive system comes into force, along with a roadmap for their inclusion by 2030.

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