Carbon Border Adjustment Mechanism (CBAM)

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.

Timeline

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.

Our Campaigns

Sandbag has been part of the Commission’s Expert Group on the CBAM since its creation, through which we have been sending recommendations.