ENTSO-E proposes delaying CBAM on electricity by one year

The European Network of Transmission System Operators for Electricity suggested to the European Commission to prolong the transitional period of the Carbon Border Adjustment Mechanism (CBAM) for electricity by one year, to January 1, 2027. It recommended an additional impact assessment, an analysis of possible exemptions for third countries as well as to exempt transmission system operators (TSOs).

In its new position paper, ENTSO-E supported the general principles of CBAM, but it warned against creating disproportionate administrative burdens and costs for TSOs. The pan-European body recommended exempting TSO activities from the CBAM scope, arguing there is a minimal risk of carbon leakage and pointing to their role in keeping the lights on and ensuring the security of the power system.

Moreover, ENTSO-E said an additional impact assessment is needed before the completion of the transitional period for electricity overall. The European Commission should also review in depth the list of third countries eligible for exemption, pending their adjustment to the European Union’s Emissions Trading System (EU ETS), it added.

The current criteria to calculate the actual emissions embedded in electricity production are impossible for importers to implement

“ENTSO-E encourages policy makers to use the targeted revision of CBAM part of the Omnibus simplification package on sustainability to postpone the definitive period as of 1 January 2027. It should also be noted that in its current form, the application of the provisions under CBAM regulation would have a major impact on the Energy Community countries and the UK imports,” the update reads.

Carbon leakage occurs when companies based in the EU move carbon-intensive production to countries with less stringent climate policies, or when EU products get replaced by more carbon-intensive imports.

CBAM was devised to bring CO2 prices for imported cement, iron and steel, aluminum, fertilizers, hydrogen and electricity to the same level as in EU ETS. Under the current rules, the EU will start charging CBAM at the beginning of January next year and gradually increase the tariffs to reach 100% at the start of 2034.

No provisions regulating implicit electricity trading

ENTSO-E acknowledged the role of the carbon border tax in putting a fair price on carbon emissions from carbon-intensive goods entering the EU, and to promote cleaner industrial production globally. Nevertheless, there are still many questions even about the current reporting obligations, it pointed out.

“TSOs adjacent to EU external borders are the most exposed to the concerns raised in this paper. It concerns a significant number of ENTSO-E members, almost one third of the EU members of the association,” the paper adds. In specific cases, the measures may also lead to efficiency losses, reduce EU competitiveness and reduce incentives for building and connecting offshore wind, it underscored.

Obstacles to importing electricity from third countries could contradict the goal of efficiently importing cheap green electricity

CBAM only assumes that electricity is traded with third countries through explicit allocation, not taking into account implicit trading. Like implicit electricity trading within the internal electricity market, there is no nomination on the interconnectors, only anonymous trading between markets, ENTSO-E explained.

“These obstacles to importing electricity from third countries could contradict the goal of efficiently importing cheap green electricity into the EU if applied also to third countries with robust decarbonisation policies and renewable energy sources. The current criteria to calculate the actual emissions embedded in electricity production make it impossible for importers to implement, mainly due to impossibility to trace the origin of the electricity,” the TSO network stressed.

CBAM would tax historical instead of actual emissions

The current default CO2 levels are based upon the carbon intensity of the five-year average through 2020, even though third countries made tremendous efforts in decarbonising their energy mix in the meantime, according to ENTSO-E. It suggested allowing such countries to be exempted if they verify their progress through proper data platforms.

ENTSO-E invited the European Commission to envisage a revision aligned with the current delay in CBAM implementing acts, stressing that it is impossible for the market to digest them before the end of the year.

Energy Community contracting parties, including the Western Balkans, are eligible for exemption from CBAM on electricity until 2030. The condition for each one is to couple its electricity market with an EU neighbor.