Carbon Border Adjustment Mechanism

As a key part of the “Fit for 55” package to meet European Green Deal objectives, in December 2022, the Council and the European Parliament reached an agreement on the final text of the Carbon Border Adjustment Mechanism (CBAM), published in the Official Journal in 2023. The basic principle of the CBAM design is foreseen as an obligation on the importer to buy CBAM certificates based on the carbon emissions embedded in the imported products. The price of the certificates corresponds to the price of allowances imposed on the  EU domestic industry under the EU ETS. The proposal of the CBAM measure intends to tackle climate change globally by addressing the risk of carbon leakage, avoiding businesses transferring production to non-EU countries with less stringent climate rules. It is also meant to encourage producers in non-EU countries to embrace climate actions.

The Regulation is initially to be applied to goods produced in some of the sectors considered at high risk of carbon leakage, like steel, cement, fertilisers, or aluminium. It will apply to direct emissions and indirect emissions only for the sectors not eligible for indirect cost compensation.

The CBAM entered into force on 1 October 2023, with a transition period until 31 December 2025. During the transition period, importers will have to submit quarterly CBAM reports containing information on the goods under the scope of the CBAM. From 1 January 2026, importers will have to submit CBAM certificates and a declaration each year. After the transition period, the CBAM will be gradually phased-in, at the same pace that EU ETS free allowances in sectors covered by the CBAM are phased-out.

The Commission is adopting secondary legislative acts to further define the application of the CBAM. Before the end of the year, the Commission is expected to propose a review of the CBAM, in particular with regard to downstream extension and the possible inclusion of an export adjustment mechanism, and with the possibility to propose a timeline for the gradual inclusion of other products, taking into account their risk of carbon leakage.

FuelsEurope welcomes the CBAM as an instrument to reduce the risk of carbon and investment leakage as the EU increases its climate ambition. However, FuelsEurope urges the EU Institutions to address fundamental flaws in the current CBAM design before progressing a potential scope extension of the CBAM Regulation to refinery products, and to address concerns on the current trajectory of the ETS 1 cap and free allowance decline rate to restore international competitiveness and enable the decarbonisation investments required for the transition.

The following elements shall be considered:

  • The revision of CBAM should be considered in parallel with the revision of the EU ETS, and the expansion of its scope should be carefully impact assessed, in particular for the refining sector
  • CBAM should coexist with current carbon leakage risk mitigation measures, which should not be further reduced compared to today’s level until CBAM effectiveness for the refinery sector has been demonstrated
  • An effective and adequate solution for export-related carbon leakage risk must be included in the carbon leakage framework
  • Provide a level playing field between EU and non-EU suppliers on GHG emission costs
  • Address the risks of circumvention and resource shuffling
  • The carbon leakage risk associated with indirect emissions costs should be addressed through an EU-wide harmonised system of indirect cost compensation for all trade-exposed sectors, rather than being included in CBAM (as indirect costs are not directly related to indirect emissions)
  • A fair methodology for the refining sector shall be developed

Read our Fit for 55 recommendations here.