In its race towards climate neutrality by 2050 and as part of a package of 13 measures, the European Commission presented its plan for a Carbon Border Adjustment Mechanism (CBAM) on Wednesday 14 July.
“This mechanism will be introduced in a prudent, gradual way and it will be fully compatible with the rules of the World Trade Organization (WTO). We will take full account of the carbon price paid in other countries and of the emission efficiency of third country producers so that this mechanism is carefully balanced and non-discriminatory”, said EU Trade Commissioner Valdis Dombrovskis.
As we have noted previously (see EUROPE 12733/9, 12756/16), the Commission is planning a mechanism modelled on the Emissions Trading Scheme (ETS) for EU importers. Imports of electricity, iron and steel, aluminium and fertilisers are currently subject to the mechanism as they account for 55% of emissions at risk of carbon leakage, according to the Commission. The Commission reserves the right to extend the system to other sectors, but does not specify a timetable.
The companies concerned will have to provide emission certificates (or CBAM certificates) according to the carbon intensity of the imported products. The price of the certificates will be aligned with the price of ETS allowances. In order to make this monitoring possible, companies will have to declare their imports to a competent national authority.
The Commission does not envisage full implementation of the mechanism before 2026. From 1 January 2023 to 31 December 2025, importers will have to report the emissions contained in their products as well as the carbon price already paid or not paid abroad. However, they will not have to provide any emission certificates during the three-year transition period.
Free quotas and CBAM
In order to avoid double protection of European companies from carbon leakage, the Commission confirms that it plans to reduce the number of emission certificates to be supplied for importers whose sectors benefit from free allowances on the internal market under the ETS.
However, these free allowances should be phased out. “Free allowances will be reduced by 10% each year, over a 10-year period”, an EU source told EUROPE.
Reception of the proposal
Most reactions to the proposal focus on the phasing out of free allowances with the entry into force of the CBAM.
This reduction path “risks destabilising the investment outlook for these sectors enormously”, warned the president of BusinessEurope, Pierre Gattaz, representing European business federations.
Agnès Evren MEP (EPP, France) also said the same thing. “This mechanism must not undermine the competitiveness of our companies by automatically ending free allowances. [...] we need a guarantee that the instruments necessary for our industrial competitiveness will only be removed if this mechanism proves to be a reliable and viable alternative”, she said.
For others, however, the end of free allowances should be much quicker than the Commission plans. MEP Pascal Canfin (Renew Europe, France) considers that the 10-year period from 2026 for the definitive abolition of free quotas is too long. “I think that we should be able to find a majority in the European Parliament to go faster. I think it is right to start with a gradual ramp-up phase, including a pilot phase from 2023. However, I am in favour of going faster than taking a decade to get the system up and running”, he told EUROPE.
Several NGOs share this opinion, such as CAN Europe and the Bellona Foundation.
“10 years of transition from free quotas means 14 years from today. It’s taking too long”, Suzana Carp of the Bellona Foundation told EUROPE. She believes that this period could end in 2030, rather than 2036.
Administrative complexity
With the announcement of the new mechanism, European SMEs are also concerned about the administrative burden of the system. “The complex calculation for the declaration of the emissions of the imported products risks that small importers face higher carbon prices for these products. The European Commission must therefore ensure that the procedures and conditions for this are easy and free of charge”, said Véronique Willems, Secretary General of SME United, representing European SMEs.
See the Commission’s proposal for a regulation: https://bit.ly/3kgPTHS (Original version in French by Léa Marchal)