CBAM Proposal to Target Imported Goods Including Steel, Iron, Fertilisers, Electricity and Aluminium

According to reports published earlier in June, the European Commission is expected to unveil a proposal in July 2021 for an EU Carbon Border Adjustment Mechanism (“CBAM”). The CBAM proposal will purportedly prevent carbon leakage in the form of a carbon border levy on certain products including imports of steel, aluminium, cement, fertilisers, iron and electricity, with a possibility of extending the product scope. The CBAM, if and when adopted, is expected to enter into force in 2023.

To prevent companies relocating to other countries with laxer regulation and to prevent carbon leakage and support the EU’s continued efforts to achieve climate neutrality by 2050, the European Commission is said to be unveiling a draft proposal for an EU CBAM in July 2021. It is understood that the CBAM will complement the EU’s Emissions Trading System (“ETS”) and also provide for a CBAM authority that will be empowered to administer the CBAM including the purchase of CBAM certificates.

Hong Kong traders interested in the product scope of the expected proposal may like to know that the CBAM will cover goods including cement, electricity, fertilisers, steel, iron and aluminium which are imported into the EU. EU importers of such products will need to apply for authorisation from the CBAM authority and thereby obtain the status of ‘authorised declarant’. However, companies which have been in existence for less than two financial years before the year of application for a CBAM certificate may only receive authorisation on the basis that they supply a guarantee covering the estimated price of CBAM certificates for the current and subsequent year.

It is understood that an authorised declarant will be expected to purchase and surrender CBAM certificates which detail the emissions embedded in the imported goods. One CBAM certificate will (reportedly) be equivalent to one tonne of embedded CO₂ emissions which will be priced at the average weekly price of one tonne of CO₂ under the EU’s ETS. However, where imported goods are already subject to a CO₂ price in the country of origin, it is noted that importers can request a discount “corresponding to the carbon price paid in the country of origin for the declared emissions”.

The future CBAM is said to further require authorised declarants to submit a declaration for the surrender of a number of CBAM certificates corresponding to the total embedded emissions in imported goods during the previous calendar year, to the CBAM Authority by 31 May each year. The CBAM declaration must further detail the emissions embedded in imported products (to be verified by an independent verifier). The CBAM declaration will be subject to review by the CBAM Authority for four years following their submission.

However, a request for a reduction in the number of CBAM certificates for surrender seems possible. This is when the authorised declarant has provided proof that the declared emissions are subject to a carbon price in the country of origin, and that such carbon price has been paid and cannot be subject to an export rebate or other form of compensation connected with the exported good, it is understood. In fact, it is anticipated that the number of CBAM certificates to be surrendered will also be reduced in accordance with the free allocation of emissions allowances under the ETS for installations producing the same kind of goods within the EU. Accordingly, the European Commission will adopt implementing acts concerning the calculation methodology for such reduction.

The proposed CBAM has been unpopular among some countries that are trading with the EU. The U.S., Turkey and Russia have explicitly raised concerns at the World Trade Organization and expressed their resistance to the plan. In Europe, support of the measure is not widespread. Indeed, it is reported that so far only nine out of twenty-seven Member States have expressed their support. Moreover, exporters in Germany are said to be concerned about what the CBAM will mean for possible retaliation.

A transition period of three years will be applicable before the full implementation of the system for CBAM certificates. During this time, the EU will purportedly apply a simplified CBAM system to companies. Such a simplified CBAM system will require an authorised declarant of goods subject to the CBAM to pay a CBAM price for each megawatt hour of electricity or for each metric tonne of other goods when the goods are declared for importation or, at the latest, once they are released for free circulation in the European Union.  

Once the European Commission has tabled its final draft for the CBAM proposal in July 2021, the proposal will be voted on by the European Parliament and the Council of the EU under the EU’s ordinary legislative procedure. Thus, to become law, it will require support from a majority of the European Parliament and the EU Member States. The CBAM is expected to enter into force in 2023.