What is CBAM?

After nearly 2 years in the legislative process, Regulation (EU) 2023/956 on the Carbon Border Adjustment Mechanism (CBAM) was officially published in the Official Journal on May 16, 2023.

What is CBAM?

“CBAM” stands for “Carbon Border Adjustment Mechanism” - a policy introduced by the European Union(EU) aims to reduce carbon emissions from imported goods and create a fair trade environment. It is the world's first carbon border tax and addresses the issue of "carbon leakage" or the shift of production abroad to avoid strict emission regulations. CBAM initially applies to certain imported goods and selected precursors with carbon-intensive production and the highest risk of carbon leakage: cement, steel, aluminum, fertilizers, electricity, and hydrogen. The phased introduction of CBAM is aligned with the removal of free allocation under the EU Emissions Trading System (ETS) to support the EU industry's emission reduction efforts. By confirming payment for the carbon emissions embedded in the production of some imported goods into the EU, CBAM will ensure that the carbon price of imports is equivalent to the domestic production and safeguards the EU's climate targets from erosion. CBAM is designed to be compatible with WTO rules.

What is Carbon Leakage?

Carbon Leakage occurs when the EU implements strict carbon emission control and pricing policies, increasing the production and operation costs for businesses in the EU. Meanwhile, non-EU countries do not implement similar restrictive measures, resulting in lower business costs. To take advantage of cost differentials, some EU businesses may relocate their production operations to non-EU countries with more lenient regulations. Although the domestic carbon emissions in the EU may decrease, the global total emissions do not decrease; they are merely shifted from the EU to other locations. This phenomenon is known as carbon leakage.

Why CBAM is Needed

CBAM (Carbon Border Adjustment Mechanism) is proposed and implemented with the goal of addressing several important issues related to carbon emissions and international trade. Here are some key reasons:

1. Facing Carbon Leakage: One of the main issues CBAM addresses is carbon leakage. When a region implements strict carbon emission policies, there is a risk that businesses may shift production abroad to avoid stringent emission regulations, causing carbon leakage. CBAM aims to prevent this phenomenon by imposing a carbon price on imported goods.
2. Trade Fairness: CBAM helps create a more fair trade environment. If imported products are not subject to carbon pricing pressure, domestic businesses will have to compete with cheaper products but with higher carbon emissions. CBAM ensures that both domestic and imported products are under pressure to reduce emissions.
3. Supporting Global Emission Reduction Goals: Setting carbon prices for imported goods can enhance global efforts to reduce emissions. This helps clarify the value of emission reduction and may motivate other countries to implement emission reduction measures.
4. Ensuring Environmental and Safety Standards: CBAM can also help ensure that imported goods comply with environmental and safety standards equivalent to domestic products. This protects consumers and the environment.

In summary, CBAM is designed to make the international market more environmentally fair, encourage emission reduction, and prevent carbon leakage. Additionally, CBAM is the world's first border carbon pricing mechanism, with the potential to establish an international standard in addressing the border issue of carbon emissions. It can play a crucial role in promoting harmony between the emission reduction efforts of countries and trade fairness. Along with that, CBAM also serves as an incentive for countries and businesses to implement emission reduction measures and invest in cleaner technologies to meet increasingly stringent international standards.

Summary of CBAM

1. Scope of Goods

Main types of goods include cement, electricity, fertilizers, steel, aluminum, and hydrogen.

2. Not Applicable

The intrinsic value of each batch does not exceed the value of goods deemed insignificant as stipulated in Article 23 of Council Regulation (EC) No 1186/2009 (€150);

Goods carried in the personal luggage of passengers from third countries with a intrinsic value not exceeding the value of goods deemed insignificant as stipulated in Article 23 of Regulation (EC) No 1186/2009 (€150);

Goods moved or used in the context of military activities as defined in Article 1(49) of Commission Regulation (EU) 2015/2446.

3. Qualified Imported Goods

Article 4 states that goods can only be imported into the EU customs territory by authorized CBAM declarants. CBAM considers the importer's declaration in the EU as its own jurisdiction, indirectly affecting the business decisions and compliance methods of exporters and operators in third countries, while transmitting CBAM regulations to different parts through the production chain.

4. CBAM Declaration

Article 6 stipulates that before May 31 each year, CBAM declarants must submit a declaration report to the customs authority of the EU Member State in which the first customs declaration of goods imported into the EU is lodged. The report should include the total amount of carbon emissions embedded in the imported goods, calculated according to the prescribed method, and the corresponding amount of financial liability.

5. Financial Liability

Article 9 clarifies the determination of financial liability, stating that the financial liability of a CBAM declarant is the product of the CBAM carbon price and the total amount of carbon emissions embedded in the imported goods declared in the declaration report.

6. Importation of Goods

Article 10 stipulates that if a CBAM declarant imports goods into the EU customs territory, the declarant must declare to the customs authority of the EU Member State in which the first customs declaration of the goods is lodged.

7. Calculation of Financial Liability

Article 12 provides specific methods for calculating the financial liability of a CBAM declarant.

Conclusion

The introduction of the Carbon Border Adjustment Mechanism (CBAM) is a significant step in the global effort to combat climate change. By addressing the issue of carbon leakage and ensuring fair competition in the international market, CBAM contributes to the European Union's commitment to achieving climate neutrality by 2050. While the implementation of CBAM may raise challenges and complexities, its potential benefits in terms of emission reduction, trade fairness, and global cooperation are substantial. As the world watches the outcomes and implications of CBAM, it remains a pioneering initiative in the intersection of environmental policies and international trade.