Introduction to CBAM
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is an ambitious initiative aimed at reducing greenhouse gas emissions by 2030 and 2050, as well as preventing climate change in countries exporting to the EU. These countries can establish similar carbon taxes in their jurisdictions, allowing them to be partially or fully exempted from CBAM.
History and Objectives
European producers have been paying for carbon emissions since 2005 through the EU Emissions Trading System (EU ETS). However, to protect the competitiveness of export-oriented goods, many of them were exempt from actual payments due to free emission allowances.
The new CBAM system will start with a limited number of goods to test its effectiveness and global impact. Gradually, CBAM will cover more goods and sectors, and European producers will lose the right to free allowances, resulting in both local producers and importers paying the full price for carbon emissions.
Stakeholder Consultations
Consultations began in 2014, discussing carbon leakage issues post-2020. Carbon leakage occurs when companies move carbon-intensive production abroad due to high carbon costs in the EU. These consultations revealed that existing measures did not sufficiently promote innovation and emission reductions.
EU Green Deal and Further Steps
In December 2019, the EU proposed the introduction of CBAM as part of the Green Deal. Public consultations on CBAM implementation options were held in 2020. Relevant regulations were adopted between 2021 and 2023.
Transition Period and Reporting
From October 1, 2023, to December 31, 2025, exporting companies must report quarterly on the carbon footprint of their products (cement, electricity, fertilizers, iron and steel, aluminum, hydrogen). Exceptions include shipments worth no more than €150 and goods in the personal baggage of passengers. Importers are required to report emissions and register as authorized CBAM declarants. CBAM certificates will not be required until the end of 2025, and financial compensations will not be paid.
Launch
Starting January 1, 2026, the final period of the mechanism will begin. Import of goods will only be allowed by authorized declarants, who must purchase certificates for product imports.
Expansion
By 2030, CBAM is planned to cover all sectors included in the EU Emissions Trading System, including oil refining, mining, production of all metals, pulp and paper, glass and ceramics, acids and organic chemicals, aviation, and shipping. Full implementation of the system is expected by 2034.
Certificate Cost
The cost of a CBAM certificate is directly linked to the price of EU ETS allowances. The certificate price is calculated weekly based on the average auction price of EU ETS allowances. Importers are required to declare emissions associated with the imported goods and purchase the corresponding number of certificates. The amount paid as a carbon tax in the exporting country can be deducted from the cost of CBAM certificates.
Conclusions
Carbon Border Adjustment Mechanism aims to reduce the carbon intensity of production both within the EU and in exporting countries. To minimize costs when exporting products to the European Union, the Russian Federation has already modernized its national legislation by creating its own quota system.