The Carbon Market – 20.03.2023

The new carbon border adjustment mechanism (CBAM)

Initially, CBAM will cover the most emission-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity. The new agreements from 13th of December 2022, however, also feature hydrogen, certain precursors and other downstream products such as screws and bolts as imports under CBAM. In addition, the EU Commission will assess the inclusion of other products that might be at risk of carbon leakages such as organic chemicals and polymers into CBAM from 2030 onwards. Indirect emissions at the production facility might also have to be part of the emissions to be reported and consequently paid for by importing companies.

Timeframe for implementation

From October 2023 importers in the sectors covered by CBAM must be ready for their monitoring, reporting and verification obligations (MRV).

The pricing mechanism shall be launched in 2026.

At the same time and rate as European industries will not receive free allocations of EUA anymore, importers of certain goods into the EU will have to pay for the emissions of their products. This carbon border adjustment mechanism (CBAM) should on the one hand create a level-playing field between EU and non-EU industries for products in the EU (both paying a similar carbon price) and increase climate ambition in non-EU states (climate instruments and carbon pricing abroad can reduce necessary payments for importers).

Two main contentious issues remain for CBAM

• How will reporting and verification methods and schemes really look like and work for imported goods? October is almost near and the MRV rules have not been yet set up.
• How to compensate or support companies that produce in the EU and must purchase EUAs but export to non-EU countries where no or less ambitious carbon pricing rules exist? Although signatories of the Climate Change Paris Agreement, regional, national or subnational mechanisms have different rules. Some 47 countries and 36 cities, states and provinces already use carbon pricing mechanisms, with more planning to implement them in the future.  Together the carbon pricing schemes now in place cover about half their emissions, which translates to about 23 percent of annual global greenhouse gas emissions.

Source: World Bank, Carbon Pricing Dashboard

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