EU Introduces Carbon Border Levy Proposal
26 July 2021
The European Commission has presented its proposed Regulation for an EU Carbon Border Adjustment Mechanism (“CBAM”). The CBAM proposal forms part of the EU’s Fit for 55 Package which aims to set out a clear path towards achieving the EU’s ambitious target of a 55% reduction in carbon emissions (compared to 1990 levels) by 2030, with the aim of becoming a climate-neutral continent by 2050. The European Commission has published a question and answer document to supplement the CBAM proposal.
According to the Commission’s proposed Regulation published on 14 July 2021, the CBAM purports to prevent the risk of carbon leakage by addressing greenhouse gas (“GHG”) emissions embedded in certain products upon their importation to the EU. According to the proposal, the future Regulation would address these GHG emissions by creating an obligation on importers to purchase and surrender CBAM certificates in relation to certain products originating in third countries that are imported into the EU. Specifically, EU importers would have to buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules.
According to the European Commission’s Q&A document, the CBAM is designed in compliance with World Trade Organization (WTO) rules and other international obligations of the EU.
On the other hand, the European Commission has stated that should a non-EU producer be able to demonstrate that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM will help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.
Hong Kong traders should note that the CBAM will initially cover imported goods, namely, cement, iron and steel aluminium, fertilisers and electricity. This is because these sectors supposedly have a high risk of carbon leakage and high carbon emissions.
It is intended that imports from all non-EU countries will be covered by the CBAM. Certain third countries which participate in the EU's Emissions Trading System (ETS) or have an emissions trading system linked to the EU’s will be excluded from the mechanism. This is the case for members of the European Economic Area and Switzerland.
For instance, the CBAM will be applied to electricity generated in and imported from countries that wish to integrate their electricity markets with the EU, until such point that they are fully integrated. Once the electricity markets are fully integrated, these countries could, under strict conditions linked to the implementation of certain obligations and commitments, be exempted from the CBAM. The European Commission has outlined that any exemptions granted by 2030 will accordingly be reviewed by the EU and any partners will be expected to have in place the decarbonisation measures they have committed to, and an ETS equivalent to the EU's.
The CBAM purports to apply to direct greenhouse gases emitted during the production process of the products covered. The European Commission will, under the proposal, require importers to report the emissions embedded in their goods without paying a financial adjustment during a transitional phase from 2023 to 2025. From 2026, the final CBAM system will be put in place. Once the definitive system becomes fully operational in 2026, it is understood that EU importers will have to annually declare the quantity of goods and the amount of embedded emissions in the total goods they imported into the EU in the preceding year, and surrender the corresponding amount of CBAM certificates.
At the end of the transition period between 2023 and 2025, the European Commission will be responsible for evaluating how the CBAM is working and whether to extend its scope to more products and services – including down the value chain – and whether to cover so-called ‘indirect’ emissions (i.e., carbon emissions from the electricity used to produce the goods).
The CBAM is similar to the EU ETS in that the system is based on the purchase of certificates by the entities concerned. The price of certificates will be determined by the weekly average price of EU ETS allowances expressed in €/tonne of CO2 emitted. As a result, importers of the goods will have to register with national authorities through a representative or individually. Importers can also buy CBAM certificates from national authorities.
The EU's ETS is said to be the world's first international emissions trading scheme and the EU's flagship policy to combat climate change. It sets a cap on the amount of greenhouse gas emissions that can be released from industrial installations in certain sectors. Allowances must be bought on the ETS trading market, though a certain number of free allowances will be distributed to prevent carbon leakage.
Hong Kong sellers may like to know that the Fit for 55 package consists of a set of inter-connected proposals. They are claimed by the European Commission to all drive towards the same goal of ensuring a fair, competitive and green transition by 2030 and beyond. Where possible existing legislation is made more ambitious and where needed new proposals are put on the table. Overall, the package strengthens eight existing pieces of legislation and presents five new initiatives, across a range policy areas and economic sectors: climate, energy and fuels, transport, buildings, land use and forestry. For a summary of the proposed measures, please click on the European Commission’s announcement.
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