Background

The European Parliament and the European Council reached a provisional agreement last month on a carbon border adjustment mechanism that will oblige importers of covered products into the European Union to pay the difference between the carbon price paid in the country of production and the price of carbon allowances under the EU’s Emissions Trading System. This measure is designed to ensure that EU and global climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.

According to a press release from the European Parliament, CBAM will cover iron and steel, cement, aluminum, fertilizers, and electricity, as had been proposed, and is also being extended to hydrogen, indirect emissions under certain conditions, certain precursors, and some downstream products such as screws and bolts and similar articles of iron or steel. The Commission will consider adding other goods at risk of carbon leakage as well, including organic chemicals and polymers, with the goal of including all goods covered by the ETS by 2030.

The Council states that the CBAM rules will apply from Oct. 1, 2023, but will have a three-year transition period where importer obligations will initially be limited to reporting. CBAM levies are then expected to be phased in between 2026 and 2034 in conjunction with the phasing out of free allowances under the ETS. In addition, both the Parliament and the Council will have to formally approve the CBAM agreement before it can take effect.

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