What is the CBAM?
On 17 May 2023, the European Union’s Carbon Border Adjustment Mechanism (CBAM) was formally adopted and entered into force. This closes a legislative process that started in 2021, when the European Commission presented its initial proposal for a mechanism that would put a carbon levy on imports of certain emission intensive products from third countries into the EU. This was part of the ‘Fit for 55’ package, a group of 12 directives and regulations aiming to achieve 55% emissions reductions compared to 1990 levels.
CBAM has emerged as an alternative to free allocation – a means of carbon leakage protection which seeks to increase the carbon costs of imports while also increasing the carbon costs of domestic producers. Carbon leakage is the displacement of emissions from jurisdictions with more to less stringent climate policies, through the displacement of production, investments, or fossil fuel consumption. Free allocation (FA) under the EU ETS is a major obstacle to innovation, industrial decarbonisation and to the well-functioning of the EU’s carbon market which is why it needs to be urgently replaced by the CBAM.
From 1 October 2023 until 31 December 2025, the CBAM is implemented as a transitional measure, with obligations limited to monitoring and reporting.
From 1 January 2026, the CBAM will become fully effective, requiring from importers a specific authorisation to import products into the EU (to be ‘authorised declarants’) and submit yearly declarations detailing the goods imported in the previous year and their verified embedded emissions.
The phase-in of the CBAM charge and the phase-out of free allocation will happen simultaneously between 2026 and 2034.
However, the replacement of free allocation with the CBAM will not cover all the sectors receiving free allowances. Even for the goods covered, a number of exemptions were granted to upstream products (‘precursors’) so only a portion of the carbon embedded in imports will be taxed.
Only the following products will be affected:
New methodologies and administrative procedures will have to be developed before the CBAM can be fully implemented in 2026. During the transitional period, 13 Implementing Acts and 4 Delegated Acts need to come into force – including:
Q2 2025: IA on Calculation of embedded emissions – Article 7(7) – to set the rules for calculating the embedded emissions of CBAM goods.
Q2 2025: IA on Free allocation of allowances under the EU ETS and obligation to surrender CBAM certificates – Article 31(2) – to determine the calculation of the deduction applied to the CBAM charge due to emission allowances being allocated for free to EU plants covered by the EU ETS
From 2026: DA on Circumvention – Article 27(6) – the Commission is empowered to modify the list of goods subject to the CBAM for anti-circumvention purposes.
Most important of all, with the agreed system, the phasing out of free allocation will only happen gradually and slowly. For the covered goods (which only represent 42% of free allowances), only 48.5% free allocation will have disappeared by 2030, and the fate of the remaining 51.5% will be decided in the scheme’s next phase. The current text mentions 2034 as the tentative phase out date.
Sandbag has been part of the Commission’s Expert Group on the CBAM since its creation, through which we have been sending recommendations.
Account for embedded carbon contained in pre- and post-consumer metal scrap when measuring the carbon footprint of imported goods pursuant to Article 7 (6) of the regulation on the CBAM.
This would reduce the risk of circumvention for aluminum and steel production due to resource shuffling. We have sent feedback to the consultation on monitoring and reporting rules outlining this in more detail.
Accelerate the CBAM if a satisfactory solution is found for export rebates.
Most parties conclude that export rebates will have to be proposed after the CBAM’s review period, in 2026 in order to prevent carbon leakage. If rebates can apply as soon as 2026, CBAM implementation should be moved forward too. A faster CBAM could free up more than 1.5bln emission allowances that are currently given to industry between 2024 and 2030 according to our research.
For products covered by the CBAM, cover all corresponding upstream products (‘precursors’) falling under the ETS by the CBAM systematically.
Despite Sandbag’s action, there many precursors were left out, and our proposal to grant the Commission the ability to add any precursors going forward, was not retained.
Latest publications on the CBAM
We welcome the Commission's draft of the CBAM implementing regulation concerning the reporting obligations and provisional methodology for calculating embedded emissions in CBAM goods. However, we have concerns regarding the accounting and monitoring rules applied to...
Sandbag’s submission to DG TAXUD’s Informal Expert Group on the Analytical Methods for the Monitoring, Reporting, Quantification and Verification of Embedded Emissions in Goods under the Scrope of the Carbon Border Adjustment Mechanism (CBAM). According to notes...
On 13 December 2022, the European Commission, Council and Parliament reached a provisional agreement on the Carbon Border Adjustment Mechanism that will partly replace the free allocation of emissions permits to polluters covered by its carbon market. This marks the...
A Carbon Border Adjustment Mechanism (CBAM) has been proposed by the European Commission as an alternative to the measures under the EU ETS that currently address the risk of carbon-intensive industries relocating to countries with no carbon pricing (carbon leakage),...
The reform of the European carbon market (ETS, for Emissions Trading Scheme) and related Carbon Border Adjustment Mechanism (CBAM) will define the future of the circular economy for years to come. These two files are in the final step of the legislative procedure, the...
The proposed Cross-Border Adjustment Mechanism (CBAM) will charge a fee based on the carbon content of some industrial products imported into the EU (listed in Annex I of the regulation), but that may not be applicable to all the embedded emissions of these products....
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