Carbon Border Adjustment Mechanism (CBAM)

What is CBAM?

On 14 July 2021, the European Commission put forward its proposal for a carbon border adjustment mechanism (CBAM), a mechanism that would put a carbon levy on imports of certain emission intensive products from third countries into the EU. This is part of the ‘Fit for 55’ package, a group of 12 directives and regulations aiming to achieve 55% emissions reductions compared to 1990 levels.  

The principal motivation for the CBAM is to replace the allocation of free emission permits to polluters as protection against ‘carbon leakage’ (the relocation of EU industries to third countries with weaker climate policies).  

Indeed, the system of granting free allowances creates wrong incentives and is unsustainable in the long run. The CBAM is proposed as an alternative to free allocation which would increase the carbon costs of imported and domestic products. 

Timeline

The free allocation of emissions permits to industry will gradually be replaced by a Carbon Border Adjustment Mechanism (CBAM): as the CBAM ramps up for imported goods, free allocation will be reduced for EU-made goods. The timeline is 2,5% in 2026, 5% in 2027, 10% in 2028, 22,5% in 2029, 48,5% in 2030, 55% in 2031, 62,5% in 2032, 80% in 2033 and 100% in 2034. 

This will only affect the following products: 

Replacing the free allocation of emissions permits with a carbon border levy is a very good thing, as free allocation is bad for circularity, low-carbon products and the carbon market. 

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. 

Keeping those emissions out of the CBAM contributes to making primary steel and aluminium competitive compared to recycled metals or other low-carbon materials. 

Precursors were initially forgotten by all three institutions (Commission, Council and Parliament), and we can safely say that without Sandbag’s action, there would be no precursors in the list of covered goods. We are however disappointed that so many precursors were left out, and that our proposal to grant the Commission the ability to add any precursors going forward, was not retained. 

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. 

Next steps 

As part of the coming review, implementation should be accelerated for sectors with low risk of circumvention. This could be the case of cement products if calculation methodologies for embedded carbon meet certain conditions. 

Export rebates 

Member States can use some of the free allowances (up to 50%) reduced by the conditionality provision to support companies whose exports could face carbon leakage. 

Vulnerability to competition outside the EU was a major objection raised by industry to a faster implementation of the CBAM. Export rebates (or more specifically, the continuation of free allocation to production destined for export) would have remedied this problem. Export rebates (for those EU plants exporting products) would not reduce decarbonisation incentives, as they would apply only to goods for non-EU markets without carbon pricing. 

The agreed system creates little certainty for export rebates, as the number of allowances freed by the conditionality provision is highly uncertain. 

What we are working on

As a solution to competition in foreign markets, export rebates could enable the EU to speed up implementation of the CBAM. The export rebate question will be revisited as part of the review by 2025, and we will strongly encourage that the two be introduced together: export rebates with a faster CBAM, which could raise up to €150 billion.