What has been in the making for years now is set to become a reality very soon. The EU’s Carbon Border Adjustment Mechanism (“CBAM”) is expected to be adopted at the plenary session of the European Parliament, which will be held on June 7, 2022. The EU is finalizing its plans to introduce a charge at its border for carbon emissions associated with products sold in the EU. This is likely to mark a tectonic shift in international trade with far-reaching implications for businesses and economies around the world that rely on exporting their goods to the European Union. In the days and weeks ahead, we will guide you through the developments as they unfold and delve deep into the risks and opportunities that may arise.
By emitting greenhouse gases (“GHGs”), multinational corporations contribute to global warming. Up to this point, most of them did not have to pay for the price of carbon, so that burden fell on planet Earth. European Union’s Emission Trading Scheme (“EU ETS”) and Carbon Border Adjustment Mechanism (“CBAM”) put a stop to this.
Climate change is an international problem that cannot be managed solely on a local level. The European Union (“EU”) has been the most outspoken proponent of climate change legislation. As a result, the EU established an EU Emission Trading Scheme (“ETS”), the world’s first and biggest carbon market.
Is the EU’s effort sufficient?
The EU has taken a huge step forward, understanding that if the world is to mitigate climate change, developed countries need to follow the same rules. That is why, in addition to the internal ETS, the EU will establish a CBAM as a part of Fit for 55 – a climate action plan to reduce GHG’s emissions in Europe by at least 55% by 2030, compared to 1990. The CBAM will put a levy on imported goods from countries where carbon prices are lower than those in the EU or non-existent. Therefore, companies operating in the EU’s market are now on notice. It seems that CBAM is the only meaningful way to ensure equivalence between the carbon pricing policy applied in the EU’s internal market – by the EU ETS – and the carbon pricing policy applied to imports.
CBAM Regulation development so far
On July 14, 2021, the European Commission (“Commission”) presented a proposal for a CBAM Regulation (“Regulation”). For the Regulation to be adopted, it must pass through the hands of the European Parliament (“Parliament”) and the Council of the EU (“Council”). In previous articles, we promised to be up to date on information on this topic, so these are the newest details.
On March 15, 2022, the Council reached an agreement on the Regulation. The Council’s position on CBAM remains very close to the Commission’s proposal. Compared to the initial proposal by the Commission, the Council opted for greater centralization of the CBAM governance. Moreover, a minimum threshold was established by which products worth less than €150 would be exempt from CBAM obligations. The Council must yet make sufficient progress on a number of matters that are closely related to CBAM but were not included in the Regulation’s proposal.
What about the Parliament?
The time has come for the Parliament to take a stand on this issue. On May 17, 2022, the Parliament’s Committee on the Environment, Public Health and Food Safety (“ENVI Committee”) adopted the Report on CBAM. The Report is expected to be adopted at the plenary session of the Parliament, which will be held June 6-9, 2022, and will represent the official position of the Parliament and the basis for the final negotiations between the Parliament, the Council and the Commission in the co-decision procedure. Major novelties proposed by the Committee include shortening the deadline for 5 years for the introduction of CBAM (2030 instead of 2035), expanding the scope of goods to which the CBAM applies and directing the revenues generated from the CBAM certificates to the EU budget with special funds to support the least developed countries in order to decarbonize their industries. The special emphasis is on centralized CBAM authority that will uniformly implement the CBAM at the level of the entire EU.
As things warm up, the assumption is that it will not be particularly difficult for the Parliament and the Council to reach an agreement regarding the existence of a centralized CBAM authority, as well as the purpose of funds raised from the sale of CBAM certificates, because they took the same position on these topics. On the other hand, there is space for harmonization regarding the dynamics of CBAM implementation and the scope of goods to which the CBAM applies, which could prolong the legislative procedure. The months ahead will show if the EU’s institutions are up to this complex green agenda, and we will continue to help you monitor and analyze further CBAM development.
Authors: Branko Gabrić, Vasilije Bošković, Nikola Ivković
