EU’s Carbon Border Adjustment Mechanism (CBAM)
Context:
- India called out EU’s Carbon Border Adjustment Mechanism (CBAM) publicly and comprehensively.
- At the WTO Public Forum it made a compelling argument against such unilateral climate measures.
Why CBAM?
- CBAM is an EU regulation and part of the ‘Fit for 55’ package. The goal of this package is to reduce greenhouse gas emissions in the EU by at least 55% by 2030.
- Currently, the EU operates a system where producers within the EU have to purchase emission allowances for the CO2 emissions of their products (EU Emissions Trading System, EU ETS).
- The CBAM price adjustment ensures that these producers no longer face a competitive disadvantage when importing from third countries with lower climate standards.
- The main goal of CBAM is to ensure that imports have paid a price for the carbon emissions produced during their manufacturing.
- This makes the carbon cost of imports comparable to domestic production, safeguarding the EU’s climate goals. Importantly, CBAM is designed to be in line with the rules set by the World Trade Organization (WTO).
To whom does CBAM apply?
- CBAM applies to importers of CBAM goods.
- These are goods in the categories: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen.
- This scope will eventually cover more than half of emissions in sectors regulated by the ETS when fully implemented.
- The transitional phase starting in October 2023 serves as a learning period to gather information and refine methodologies in collaboration with importers, producers, and authorities.
- During the transition, importers only need to report embedded greenhouse gas emissions without making financial payments.
- After this phase, indirect emissions will also be included for certain sectors like cement and fertilizers, based on defined methodologies.
- Flexibility is provided for reporting values during the first year, however, from January 1, 2025, only the EU method will be accepted.
What are the phases of CBAM entry into force?
The entry into force consists of 2 phases:
- the transition phase (from 1 October 2023 to 31 December 2025)
- the overall entry into force (from 1 January 2026)
What are the Implications for global businesses?
- CBAM and changes to the EU ETS will impact businesses worldwide, influencing operations and strategic choices.
- These effects can be direct or indirect, calling for a comprehensive approach along the value and supply chains.
- Companies within the EU ETS scope need to anticipate higher carbon expenses if they continue using traditional fuels, potentially affecting their competitive standing in emission-heavy industries across the EU and global markets.
- The introduction of the new EU ETS II will further raise conventional fuel costs, potentially accelerating the need for sector transformation.
- Importantly, the EU and its Member States offer diverse grant and incentive programs to support businesses in transitioning, while additional carbon market revenues can provide funding opportunities through the EU Innovation Fund, particularly for those adopting innovative low-carbon technologies.
Syllabus: Prelims + Mains; GS III – Environment
