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On October 1, 2023, the first phase of the European Union’s Carbon Border Adjustment Mechanism (CBAM) came into effect.
Part of the EU’s Green Deal package of new rules aimed at reducing emissions at least 55% by 20230, the CBAM is expected to:
ensure producers within the EU are not disadvantaged by having to comply with EU decarbonization rules; and
discourage “carbon leakage” – that is, having European companies move operations to countries with less stringent climate policies, then sell back to EU consumers.
In January 2026, the CBAM will impose border tariffs on European goods imports involving carbon-intensive production. Until then, soon-to-be-affected importers, as well as producers and relevant authorities, will have the chance to familiarize themselves with how this new taxation system works by being obliged to merely report the greenhouse gas emissions, both direct and indirect, embedded in products they’re importing. The first reporting period ends January 31, 2024.
Goods covered by the CBAM’s first phase include cement, iron, steel, aluminum, fertilisers, electricity, and hydrogen. Those importing the foregoing into the EU will have to register with national authorities and (once tariffs are imposed) purchase CBAM certificates, which can be surrendered to ‘pay’ for goods' emissions embedded.
The EU’s executive branch, the European Commission, expects that even in this transitional first phase which only requires reporting, CBAM should spur producers around the world to start investing more heavily in local decarbonisation, both to avoid the incoming tariffs and to their improve their products’ competitiveness in the EU market. Additionally, because the system includes partial tariff waivers for carbon taxes paid in the countries where goods are produced, it incentivizes countries outside of the EU to implement stricter climate rules.
Unsurprisingly, EU trading partners are not entirely thrilled. The US is already seeking CBAM exemptions for steel and aluminum exports, and Bloomberg expects the new EU rules “to face legal challenges at the [World Trade Organization] and disputes with trading partners.” However, it is also worth noting that both Canada and the US are considering cooperating on their own border tariffs to combat anticipated “carbon leakage.”
For those interested in learning more about CBAM, the European Commission’s helpful website provides an overview, along with more detailed guidance, webinars, e-learning courses, and even a 60-second YouTube video that quickly summarizes the CBAM and its purpose.
Please contact our firm at 647-725-4308 or info@greeneconomylaw.com for legal assistance in connection with carbon pricing and other climate policy matters.