Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (known as “CBAM”) is a carbon border tariff that, once it becomes fully operational, will oblige EU importers to buy carbon certificates for imported goods, corresponding to the carbon price that would have been paid if the production had taken place in the EU and been subject to EU carbon pricing rules.

The regulation providing the adjustment mechanism was approved by the European Parliament and the Council on May 10, 2023 (Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023) and was published in the Official Journal of the European Union on May 16, 2023.

The regulation establishes a transitional period beginning on October 1, 2023, and ending in 2026. During this period, importers of goods covered by the regulation will be obliged to inform of the greenhouse gas (“GHG”) emissions caused directly or indirectly by their imports, without being subject to any payment or adjustment. Annex IV of the regulation sets out the calculation methods for this purpose.

Once the mechanism becomes fully effective on January 1, 2026, importers will be obliged to submit an annual report (in May of the following year) on the amount of goods imported into the EU and the correlative GHG emissions, and later surrender the number of CBAM certificates corresponding to those declared emissions. The price of the CBAM certificates will be calculated based on the cost of CO₂ emission allowances. It aims to phase in CBAM certificates by gradually ceasing the free allocation of emission allowances in the period 2026-2034.

However, if importers can prove that a carbon price has already been paid during the production of the imported goods (in the form of a tax, rate or fee, or in the form of an emissions allowance in the framework of a GHG emission trading scheme), the corresponding amount can be deducted by delivering the CBAM certificate.

The Commission is expected to adopt an implementing act, in which it will develop the rules in greater depth and set out the requirements on reporting emissions.

The CBAM will initially apply to the import of goods the production of which is most carbon intensive (i.e., cement, iron and steel, aluminum, fertilizers, electricity and hydrogen, listed in Annexes I and II), although the regulation envisages a gradual further extension of the scope.

Annex III of the Regulation excludes from its scope of application goods originating from certain countries (Iceland, Liechtenstein, Norway and Switzerland) and certain territories, including Ceuta and Melilla, among others. The Commission may add further countries and territories to this list if they participate in an EU GHG emission trading scheme or they reach an agreement to that effect, as long as the emission trading scheme also applies to the emissions embedded in the goods. The regulation also foresees that third countries or territories listed in Annex III may be removed from it under certain conditions.