Members' Research Service By / January 24, 2022

EU carbon border adjustment mechanism: Implications for climate and competitiveness [EU Legislation in Progress]

The European Union (EU) is a pioneer of large-scale carbon pricing, and the EU emissions trading system (ETS), established in 2005, is the world’s biggest carbon market.

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Written Henrique Morgado Simões (5th edition, updated on 13.06.2023).

The EU has the world’s largest carbon-pricing system, the emissions trading system (ETS). Emissions pricing can encourage industrial decarbonisation, but it also risks carbon leakage, whereby EU companies move their production abroad. To date, the EU has mitigated this risk through free allocations to certain industries, but with rising climate ambition and higher carbon prices, the Commission is now seeking to phase out free allocations.

A new carbon border adjustment mechanism (CBAM) would also be introduced, requiring EU importers, as of 2026, to purchase certificates equivalent to the weekly EU carbon price. The CBAM would initially apply to imports in five emissions-intensive sectors deemed at greater risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, and electricity. The CBAM charge would cover imports of these goods from all third countries but those included in the ETS or a linked mechanism.

The CBAM aims to contribute to the EU’s climate neutrality objectives, and encourage partner countries to decarbonise their production processes by levelling the playing field in carbon pricing between the EU and third-country producers. Parliament referred the file to the Committee on Environment, Public Health and Food Safety (ENVI). The Council adopted its general approach on 15 March and Parliament adopted its negotiating position on 22 June 2022. A provisional trilogue agreement was reached on 13 December, and confirmed by both co-legislators. The final act was published in the Official Journal on 16 May 2023 and comes fully into effect as of January 2026.

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Proposal for a regulation of the European Parliament and the Council establishing a carbon border adjustment mechanism
Committee responsible:Environment, Public Health and Food Safety (ENVI)COM(2021) 564
Rapporteur:Mohammed Chahim (S&D, Netherlands)2021/0214(COD)
Shadow rapporteurs:Adam Jarubas (EPP, Poland); Nicolae Ştefănuță (Renew, Romania); Manuela Ripa (Greens/EFA, Germany); Catherine Griset (ID, France); Hermann Tertsch (ECR, Spain); Malin Björk (The Left, Sweden)Ordinary legislative procedure (COD)
(Parliament and Council on
equal footing – formerly ‘co-decision’)
Next steps expected:
Regulation (EU) 2023/956
OJ L 130, 16.5.2023, pp. 52–104

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