EU reaches deal on carbon border tax

The European Parliament and the Council of the EU have reached a provisional agreement on the introduction of the Carbon Border Adjustment Mechanism (CBAM). They agreed to apply carbon tax on imported commodities and electricity from October 1, 2023, pushing it back from the previously announced January 1, 2023.

CBAM or or the new carbon leakage tool, as it is also called, will cover iron and steel, cement, aluminum, fertilizers and electricity, as proposed by the European Commission, and be extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as some downstream products such as screws and bolts and similar articles of iron or steel, according to the European Parliament.

The new regulation will be the first of its kind, and is designed to be in full compliance with World Trade Organization (WTO) rules.

The scope of the tax has been broadened to include hydrogen

CBAM will apply from October 1, 2023, with a transition period where importers will only be obliged to report on emissions of the imported goods. To avoid double protection of EU industries, the length of the transition period and the full phase-in of CBAM will be linked to phasing out free allowances under the EU Emissions Trading System (EU ETS).

These details will be known after the negotiations scheduled for later this week, together with a revision of the EU ETS, according to the EP. The proposed transition period is three years.

The transition period will be discussed later this week

After the transition period ends companies that import into the EU will be obliged to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.

Before the end of the transition period the European Commission will assess whether to extend the scope to other goods, including organic chemicals and polymers. The aim is to include all goods covered by the ETS by 2030.

This deal is dependent on an agreement on the reform of the EU ETS

The methodology for indirect emissions and the possibility to include more downstream products will also be assessed, said the EP.

This deal between EP and Council is dependent on an agreement on the reform of the EU ETS. CBAM is part of the Fit for 55 package.

The law will incentivize non-EU countries to increase their climate ambition

The EU aims to use CBAM to equalize the price of carbon paid for EU products operating under the EU ETS and the one for imported goods.

According to the EP, the law will incentivize non-EU countries to increase their climate ambition, because only countries with the same climate ambition as the EU will be able to export to the EU without buying CBAM certificates.

Of note, CBAM is likely to impact countries in the Western Balkans and Turkey financially, which is why experts from the region insist that the issue must become mainstream in these states.

So far, half of the Western Balkan countries have taken first tangible steps to introduce CO2 taxation.