What is CBAM?
CBAM is part of the European ‘Fit for 55’ package and obligates companies that import high emission goods into the EU to purchase CBAM emission allowances to compensate for the difference between the CO2 price paid in the country of origin and the higher price of the allowances in the EU Emissions Trading System. The system affects a large number of industrial and trading companies.
CBAM has been introduced starting gradually in October 2023 in order to slowly familiarise participating companies inside and outside the EU with the reporting obligations and methods for determining embedded emissions in accordance with the requirements of the EU Emissions Trading Scheme. Initially, the instrument only applies to electricity, cement, iron and steel, aluminium, fertilisers and hydrogen. The processes used to manufacture these products are accompanied by particularly high CO2 emissions and therefore exposed to a high risk of carbon leakage (CL).
CBAM’s principle is that the same CO2 price applies to imported and EU-manufactured products. The problem is that European emissions trading has made the production of high emission goods in Germany and the EU more expensive. If industrial raw materials and goods from other countries are now also subject to a CO2 price in the EU, this protects against competitive disadvantages and ‘carbon leakage’ (emission increase due to the relocation of industrial production abroad, where little or no CO2 pricing is applied to the manufactured goods). The prior practice of granting industrial companies a free allocation of emission allowances to guard against direct carbon leakage through the EU ETS is then no longer necessary. This allows the CO2 price in the EU to operate with greater effectiveness. In addition, carbon price for imports also creates financial incentives for companies in third countries to protect the climate. CBAM therefore combines carbon leakage protection and effective CO2 pricing. The EU's aim is to promote effective methods of decarbonisation worldwide.
Information by the German Envoronment Agency
UBA factsheet (2023): Introduction of a Carbon Border Adjustment Mechanism (CBAM) in the EU
EU Commission proposes comprehensive reform of emissions trading
Timeline
The EU CBAM Regulation (2023/956) came into force in May 2023 initiating a two-year transition phase that started on 01/10/2023. During this period, participating companies, i.e. importers of industrial raw materials and goods, must submit quarterly reports detailing the emissions associated with these products. No financial obligations arise during the transition phase.
From the regular phase, which begins on 01/01/2026, importers of CBAM goods must be authorised as CBAM declarants. In addition, CBAM certificates must be acquired and surrendered for the emissions associated with the imported goods.
CBAM will be gradually expanded from 2026 to 2034. At the same time, free allocation in the EU ETS will be phased out for these industries.
CBAM in 60 seconds
Explanatory film by the European Commission
Explanatory film of the Directorate-General for Taxation and Customs Union (DG TAXUD) ‘Carbon Border Adjustment Mechanism in 60 seconds’: Because the EU is increasing its climate targets while non-EU countries have less stringent environmental and climate policies, there is a high risk of so-called ‘carbon leakage’ emissions, which can shift emissions outside Europe and undermine EU and global climate efforts. This is why the EU needs the Carbon Border Adjustment Mechanism (CBAM) for the import of goods from third countries: a system that sets a fair price for the carbon emitted during production and promotes clean industry in third countries.
