New regulation for European carbon prices: the Carbon Border Adjustment Mechanism

On 1 October 2023, the Carbon Border Adjustment Mechanism (CBAM) came into force. This is a new tool through which Europe aims to combat carbon leakage and to put a fair price on the carbon emissions of certain goods entering the European Union. The CBAM will have a direct impact on organisations working with carbon-intensive goods and materials, and indirectly affect the carbon approach of other companies. Here we summarise the main points for you.

September 9, 2024

Sophie Maeseele

Datamanagement

The CBAM in a nutshell

The CBAM is a regulation through which the European Union calculates a carbon price, based on the greenhouse gas emissions generated by the production of certain goods. The purpose of the CBAM is twofold: Europe wants to use it both to create a level playing field between producers to counter unfair competition from companies outside the EU, and to prevent carbon leakage (see below).

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The CBAM will initially apply to imported goods from sectors with a carbon-intensive production process and with a substantial risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. Over time, the regulation may be extended to other sectors.

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The CBAM is being rolled out in phases, with a transition period – which started on 1 October 2023 – during which there is only a reporting obligation. Europe will use this period to collect useful information and refine the methodology for the definitive phase. From 1 January 2026 onwards, each declaration must also be linked to the correct number of CBAM certificates, which you can obtain by paying a carbon price. If you can prove that you have already paid a carbon price in the producing country, this amount can be deducted from your total. You can request the CBAM certificates from the Belgian FPS Public Health, Food Chain Safety and Environment.

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These are the requirements for each phase and the corresponding timeline:

The CBAM as the ETS's younger brother

The CBAM works in much the same way as the already-existing EU Emissions Trading System (ETS). The CBAM now expands the scale, requiring companies to also pay a CO2 price for emissions generated from the production of specific goods outside the EU.

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The premise of both mechanisms is the same, although there are substantial differences. Companies under the ETS and/or CBAM are only allowed to emit or import CO2 for which they have allowances. Thus, companies are encouraged to emit less, and pay a price for what they continue to emit.

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The CBAM will organise its carbon pricing in a similar way to the ETS: the price of CBAM certificates will be calculated based on the weekly average auction price of EU ETS allowances, expressed in €/tonne CO2. Thus, an equivalent carbon price will be paid for domestic and imported products.

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Moreover, the recent revision of the ETS envisaged a symmetrical phasing with the CBAM. Indeed, in the revised EU ETS, free allowances for sectors covered by the CBAM will be phased out from 2026 onwards.

Who will be impacted most?

The introduction of the CBAM will initially have a significant impact on importers: the lion’s share of the administrative responsibility lies with them. All players active in the sectors covered by the CBAM had best work their way into the matter as well.

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But the impact will be felt more broadly. For instance, the global economy is expected to accelerate its shift to renewable energy and low-carbon products and services. After all, an ever-increasing price of CO2 will encourage people to look for energy-saving solutions and low-carbon alternatives.

What is carbon leakage?

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While many non-EU countries have less stringent climate policies than ours, there remains a risk of carbon leakage. But what exactly is carbon leakage, and why is it a problem? CO₂ experts Liesbeth Voets and Liesel Boutsen briefly explain:

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“Carbon leakage occurs when EU-based companies move their carbon-intensive production to other regions, or when imports from those regions replace goods produced within the EU.”

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“On the one hand, carbon leakage implies an environmental disadvantage. It undermines European environmental measures, as production methods within Europe are often more advanced than those employed in other regions. Imported products therefore have higher CO2 emissions, even before we take into account the transport of such products to Europe.”

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“On the other hand, there are also negative economic consequences associated with carbon leakage. Moving our production abroad can lead to job losses and reduced competitiveness in the sectors concerned. Europe itself also loses revenue as a result. However, the CBAM’s price correction means that EU producers will no longer face disadvantages in the face of imports from countries with less stringent climate standards.”

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“The ETS had a system to tackle carbon leakage. Certain sectors received special treatment and thus an extra high number of free allowances for emissions. The CBAM is now replacing this system.”

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Getting a good overview of the CO2 emissions contained in imported goods and your possible future CBAM obligations is no mean feat. Engage Pantarein to help you with this. Contact us at mail@pantarein.be.

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New regulation for European carbon prices: the Carbon Border Adjustment Mechanism

The CBAM in a nutshell

The CBAM as the ETS's younger brother

Who will be impacted most?

What is carbon leakage?

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New regulation for European carbon prices: the Carbon Border Adjustment Mechanism

The CBAM in a nutshell

The CBAM as the ETS's younger brother

Who will be impacted most?

What is carbon leakage?

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