CBAM – Carbon Border Adjustment Mechanism

CBAM – Carbon Border Adjustment Mechanism

The European Parliament has agreed with a majority of member states to reform the EU’s Emissions Trading System (ETS). The expanded ETS will encourage industry to further reduce emissions and invest in low-carbon technologies.

In 2021, the European Union announced plans to introduce the Carbon Border Adjustment Mechanism (CBAM) in 2023. CBAM is a climate measure that aims to address the risk of carbon leakage by ensuring original carbon pricing for imports and domestic (EU) products that are subject to carbon costs under the EU ETS.

In simple words, CBAM, more commonly known as the ‘carbon border tax’, is an EU proposal to ensure that imports of certain goods to the EU pay the same price on carbon emissions, as would have been paid if these goods have been produced in the EU.

This tax will ultimately require importers to pay a levy on all carbon emissions that are associated with the goods they bring into the market.

Why and How

The European Union (EU) is shifting towards the aim to significantly reduce greenhouse gas emissions by 2030. The core element of the CBAM is the obligation to pay for the greenhouse gas (GHG) emissions embedded in certain carbon-intensive products imported into the EU through the purchase of so- called CBAM certificates.

CBAM will be operational from October 2023 and will initially cover several specific products in the steel, cement, fertilizer, aluminum, and power sectors. After the transition period, the scope will be extended to hydrogen, indirect emissions, precursors, and some downstream products (iron/steel).

Key Actions and Considerations:

• Frequently monitor CBAM developments, especially regarding advancing the scope to include additional covered products
• Improve business and contact suppliers to reduce carbon footprint and build a sustainable and green supply chain
• Review the global supply chains to determine the potential impact of CBAM
• An equal amount of CBAM revenues from the EU budget will be used to help the least developed countries transition to a green economy

India’s Stand and impact

India, along with China, Brazil, and South Africa, opposed carbon border taxes at the COP27. This grouping has said such taxes could “result in market distortion” and “aggravate trust deficit among the Parties”. Developing countries say the CBAM puts the burden of climate action on them, while it is the rich nations that have contributed the most to warming.

According to EU its CBAM is WTO-compliant, but many countries will be challenging it before the global trade regulator. Rabobank research from 2021 placed India, along with Russia, Ukraine, Turkey, and China, among the countries that are potentially most affected by the move.

India exports about $2 billion worth of products annually to the EU that would attract the CBAM levy. Most of it is in the iron and steel space, with aluminum making up the rest.

Nearly 35% of India’s exports that would qualify for the CBAM levy are to the EU.  While the UK and China have significant exposure too, what works to their advantage is the existence of their national carbon markets that would allow EU importers to defray part of the CBAM levy for purchases from producers in these countries.

Enexion Expertise

Under CBAM, importers will report annually total authenticated GHG emissions embedded in goods they imported in given calendar year.

Initially, EU importers will be required to “just” document and report the embedded emissions of various materials but starting in 2026 will have to pay a levy on each metric ton of CO2e. Compliance for this tax system will only get more complex, thus efficiently managing the new CBAM requirements is crucial.

Our consulting experts from Europe [Turkey and Germany] can help you understand the implication of CBAM on your business.