EU comes to landmark agreement on a carbon tax 

The EU continued this week to make progress on its Green Deal ambitions after the Council and European Parliament came to a provisional agreement on the so-called, Carbon Border Adjustment Mechanism (CBAM). Once implemented, the CBAM will introduce a levy on carbon intensive goods entering the EU market. By mirroring the EU’s own internal carbon price under the EU’s emission’s trading system (ETS), European industry will be shielded from cheaper, more polluting products imported from abroad. 

Under this regulation, 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 under the ETS. 

Negotiations for the revision of the EU’s ETS are currently underway. This means the implementation of the CBAM is dependent on an agreement being reached, which is expected imminently. Once negotiators come to an agreement, the revised ETS rules will be integrated into the CBAM. 

By incentivising non-EU countries to increase their climate ambitions, the CBAM will play a significant role in global efforts to tackle the climate crisis. The rules are designed in such a way to ensure that climate efforts, both global and European, are not undermined by production being relocated outside the EU to third countries with less ambitious policies. Under the newly agreed rules, only countries with the same climate ambition as the EU will be allowed export to the EU without buying CBAM certificates. 

This new regulation, which will be the first of its kind, is designed to be in full compliance with WTO rules – a concern for many throughout the negotiations. 

As initially proposed by the Commission, the regulation will cover iron, steel, cement, aluminium, fertilisers and electricity. In the final agreement, the scope has been extended to also cover hydrogen, indirect emissions under certain conditions and some downstream products like screws and bolts. In order to avoid the double protection of EU industries, the length of the transition period and the full phase in of the CBAM will be linked to the phasing out of free allowances of the ETS.

Chair of the European Parliament’s Environment Committee (ENVI) MEP Pascal Canfin, welcomed the agreement describing it as a “major step that will allow [the EU] to do more for the climate while protecting [EU] businesses and [EU] jobs. Lead negotiator in the European Parliament, Mohammed Chahim, described CBAM as a “crucial” part of the European climate action policies and highlighted that it will be one of the only mechanism to incentivise the EU’s trading partners to decarbonise their manufacturing industry. 

In line with the provisional agreement reached on 13 December, CBAM will operate from October 2023. Initially, a simplified version of CBAM will apply with just reporting obligations. The aim here is to collect data. 

Thereafter, the full CBAM will be introduced on a gradual basis.