As we explained in the recent client alert on the EU Carbon Border Adjustment Mechanism (CBAM), the European Commission presented a legislative proposal on the CBAM (Commission proposal) in July 2021. Based on the Commission's proposal, the CBAM will apply to cement, fertilisers, iron and steel, aluminium, and electricity, and is expected to enter into force as early as 2023 in a transitional form, and to fully apply from 2026.
The final text will have to be agreed by the European Parliament and the Council (consisting of EU member states). Both institutions are currently reviewing the Commission's proposal and will present their positions, which is likely to bring changes to final text of the CBAM proposal. In this regard, Mohammed Chahim (Socialists & Democrats), who is the lead rapporteur on CBAM at the European Parliament’s Environment Committee, prepared a draft report on the Commission's proposal with amendments. On 5 January 2022, the draft report was shared with shadow rapporteurs in the Parliament for discussion.
The Parliament Environment Committee’s draft report proposes the following five major changes to the Commission proposal:
1. Broadening the scope, to include more targeted goods and indirect emission
The Commission’s CBAM proposal targets imports of cement, fertilisers, iron and steel, aluminium, and electricity and only applies to direct emissions released during the production process of the covered goods. The draft report, however, suggests to also include organic chemicals, hydrogen and polymers, given their carbon and trade intensity, and to extend CBAM to indirect emissions such as emissions generated from electricity used for manufacturing goods.
2. Faster implementation and phase-out of free allowances
The Commission’s proposal states that the CBAM will have two years of transitional period (2023-2025) and that free allowances made under the EU ETS in sectors covered by the CBAM will gradually phase out over 10 years (with a complete phase-out in 2035). However, the draft report proposes to shorten the transitional period by one year (2023-2024), so that CBAM can fully apply from 2025. Further, it suggests an incremental pace for completely phasing out free allowances by the end of 2028, with the except of cement where free allowances would be phased out by the end of 2025.
3. One centralized CBAM authority
According to the Commission’s proposal, competent national authorities of the 27 EU members states will play a key role in implementing the CBAM by authorizing declarants, reviewing and verifying CBAM declarations, and selling CBAM certificates to EU importers. The draft report points out that such a decentralized system will lead to an uneven implementation and possible trade distortions. Instead, it suggests to establish one centralized CBAM authority.
4. Using CBAM revenues to assist least developed countries (LDCs)
While CBAM revenue will be a new own resource of the EU (EU budget), the Commission’s proposal does not specify how CBAM revenues will be used. The draft report suggests using CBAM revenues to financially support LDCs’ efforts to stimulate decarbonisation and that financial support should be at least equivalent to yearly revenues generated by the sale of CBAM certificates.
5. Defining the scope of implementing acts
The Commission’s proposal leaves a number of key elements of the CBAM to be defined through Commission’s implementing acts on a variety of topics such as the calculation methods of embedded emissions set out in Annex III, verification of embedded emissions, the methodology for calculating the reduction in the number of CBAM certificates to be purchased to take into account the carbon price paid in a country of origin. The draft report points out that some of these empowerments are vague and far-reaching, for example the calculation methods of embedded emissions. Thus, it revised the text to better define the scope of the empowerments granted to the Commission and ensure that the co-legislators (Parliament and Council) remain responsible for the essential elements of the regulation.
Next steps: The draft report is expected to be discussed in the Parliament’s Environment Committee in February 2022 and be voted in April 2022. This will lead to the negotiating position of the Parliament, which will ultimately shape the EU CBAM during the trilogues among EU institutions to take place later in the year. Final agreement on CBAM between the EU institutions is expected during the French Presidency of the Council of the EU, which ends on 30 June 2022.
Any questions? Please do not hesitate to contact Reed Smith’s customs & trade team and environmental & product compliance team. With our deep understanding of EU customs law and EU ETS, we are uniquely positioned to help businesses understand the CBAM as it develops, assess the risk and impact on business operations, and provide practical solutions.