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

Written by Jana Titievskaia and Henrique Morgado Simões with Alina Dobreva (4th edition, updated on 24.03.2023).

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; less developed countries could be supported in their climate transitions. 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. Parliament and Council reached a provisional trilogue agreement on 13 December which now needs to be formally confirmed by both institutions.

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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; less developed countries could be supported in their climate transitions. Following publication of the Commission proposal on the CBAM in July 2021, Parliament referred the file to the Environment Committee. On 22 June 2022 the Parliament adopted its position, while on 15 March 2022 the Council had adopted its general approach.

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• July 2022: EU carbon border adjustment mechanism: Implications for climate and competitiveness (4th edition)