EU Introduces New Mechanism to Restrict "Carbon Leakage"
Climate challenges are growing day by day. The need for more global solutions is essential. This article reflects an overview of the new Carbon Border Adjustment Mechanism (CBAM) regulation in the EU that aims to cover “Carbon leakage”. Moreover, there is a fact sheet for better understating of the new CBAM regulation.
The current climate crisis situation is more urgent than ever, highlighting the need for global solutions. The European Union (EU) is already in the process of developing its own ambitious climate plan. However, the prevalence of fewer climate policies in many non-EU countries poses high risks.
One of these risks is known as 'carbon leakage.' To address this issue, the Carbon Border Adjustment Mechanism (CBAM) regulation has been introduced. This mechanism aims to tackle carbon leakage, which occurs when EU-based companies relocate carbon-intensive production to countries with fewer climate policies or when carbon-intensive imports replace EU products.
The CBAM regulation was officially implemented upon its publication in the Official Journal of the EU on 16 May 2023. The co-legislators signed the Carbon Border Adjustment Mechanism on 10 May 2023. The regulation will enter into its transitional phase on 1 October 2023, with the first reporting period for importers ending on 31 January 2024. During this transitional phase, EU importers will not be required to make any financial adjustments to ensure a smooth rollout.
In the initial phase of implementation, the CBAM regulation will primarily focus on goods that are most susceptible to carbon leakage: cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity.
During the transitional phase, the scope of products covered by the CBAM mechanism will be reviewed to determine the feasibility of including additional goods produced in sectors covered by the EU Emissions Trading System (ETS).
Starting from 2026, EU importers of goods covered by the CBAM will be required to purchase CBAM certificates. The price of these certificates will be calculated based on the weekly average auction price of EU ETS allowances, expressed in euros per tonne of CO2 emitted. If importers can provide verified information from third-country producers proving that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted from their final bill.
Additionally, EU importers must declare, by 31 May each year, the quantity of goods imported into the EU in the preceding year and the embedded emissions in those goods. They must also provide the corresponding number of CBAM certificates that match the amount of greenhouse gas emissions embedded in the products.
Below, The Millennial Agora team has prepared a fact sheet about CBAM regulation: