Energy & Climate Change | European Parliament and Council reaches provisional agreement on the establishment of the EU Carbon Border Adjustment Mechanism

Today, 13 December 2022, the European Parliament and Council reached provisional agreement to establish the EU Carbon Border Adjustment Mechanism (“CBAM”) as an important instrument to promote European climate targets and prevent carbon leakage.

CBAM is closely linked to the European Emissions Trading System (“EU ETS”) and is one of several carbon price reforms proposed as part of the European Green Deal and the Fit for 55 package published by the European Commission on 14 July 2021. The key objective of CBAM is to reduce the risk of carbon leakage by ensuring equivalent carbon pricing between domestic products comprised by EU ETS and imported products within certain sectors. Consequently, CBAM will require EU importers to buy carbon certificates which correspond to the carbon price an EU producer would have to pay under EU ETS, to the extent the non-EU producer has not already incurred such carbon costs.

The provisional agreement

The provisional agreement between the European Parliament and the Council reached today is not yet published, but it has been stated that the agreement reached is close to the European Parliament’s position from 22 July 2022. While details on the content of today’s agreement remains undisclosed, our understanding so far, based on available information, is that it includes the following elements worth highlighting:

CBAM is closely interlinked to EU ETS and the provisional agreement is subject to agreement on, inter alia, EU ETS amendments proposed as part of the Fit for 55 package. Trilogue negotiations on the EU ETS proposals are scheduled this Friday and Saturday, where important aspects include mechanisms for EU export and the rate of decrease for free allowances when CBAM is phased in. CBAM is set to enter into force on 1 October 2023, starting with a three year’s implementation period.

CBAM will cover iron, steel, cement, aluminum, fertilizers and electricity, as previously proposed by the Commission. In addition, the provisional agreement extends CBAM to certain other products where it is worth noting that it will be extended to include, inter alia, hydrogen and, under certain conditions, indirect emissions. Based on our understanding, an approach on how to include other EU ETS products will be adopted by 2030 at the latest.

BAHR’s view

There have been some discussions on the EEA relevance of CBAM. Given the relationship between CBAM and the EU ETS, where the latter already applies to Norway, CBAM will be of importance for Norway as an EEA Contracting Party irrespective of the potential form of EEA implementation. One of several areas of interest, is the application of the final CBAM and EU ETS rules for hydrogen, where the rate of decrease of free allowances, as well as the rules for indirect emissions (and their relevance for the CO2 compensation scheme), will be relevant for ongoing and future green hydrogen projects.