On April 18th, 2023 EU Parliament agreed on (i) adoption of Carbon Border Adjustment Mechanism (CBAM), (ii) phasing out free allowances in the Emissions Trading System (ETS) from 2026, (iii) introducing road transport and buildings in new ETS II from 2027, and (iv) establishing a Social Climate Fund to combat energy and mobility poverty.
All instruments are a part of the “Fit for 55 in 2030 package”. After the vote, the propositions will be reviewed by the Council of Ministers (which is expected to approve them without changes), and then published within 20 days in the Official Journal of the European Union (thus May 2023 according to the predictions).
CBAM
CBAM is a policy that aims to address the issue of carbon leakage and create a level playing field for EU-based businesses. The policy introduces charges for CO2 emissions (the so-called carbon tax) for high-emission products placed on the EU market.
CBAM will cover the following categories of goods:
- iron,
- steel,
- cement,
- aluminium,
- fertilisers,
- electricity,
- hydrogen
- indirect emissions under certain conditions.
Implementation of CBAM is divided into two phases. During the first (the so-called transition period) starting from October 1, 2023, the declarants of imported goods will only be required to submit a CBAM report on a quarterly basis. During the transition period, the amount of free ETS allowances will be 100%.
In the second phase, starting as of January 1st, 2026, the importers will be obliged to submit yearly CBAM declarations (by May 31st) which shall include, i.e. information on the total number of CBAM certificates to be surrendered. The same deadline shall apply to surrender CBAM certificates that correspond to the embedded emissions. Additionally, the amount of free ETS certificates will be gradually reduced.
While CBAM may create challenges for businesses, it also creates opportunities for those who invest in sustainability and differentiate themselves in the market. As such, entrepreneurs need to be aware of the potential impacts of the CBAM and adapt their strategies accordingly to remain competitive in the changing market environment.
Changes to the ETS and introduction of ETS II
EU Parliament approved phasing out ETS free allowances. The process shall start from 2026 and end by 2034. The free allocation of allowances was implemented to mitigate the risk of carbon leakage by reducing the costs of compliance faced by the operators covered by the EU ETS. Introduction of CBAM enables the EU to resign from this protection mechanism.
Regardless of the above, the EU Parliament decided to create a separate new ETS II for fuel for road transport and buildings that will put a price on GHG emissions from these sectors in 2027 (or 2028 if energy prices are exceptionally high).
A Social Climate Fund to combat energy and mobility poverty
The Fund will be funded partially from auctioning ETS II allowances and national resources It’s aim is to help vulnerable households, micro-enterprises and transport users who are particularly affected by energy and transport poverty.
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