Carbon Border Adjustment Mechanism (CBAM) Implementation

Carbon Border Adjustment Mechanism (CBAM) Implementation

On August 17th, 2023, the European Commission approved comprehensive reporting regulations for its recently established Carbon Border Adjustment Mechanism (CBAM). The initial phase of this mechanism began in October 2023, imposing greenhouse gas reporting requirements on importers of specific carbon-intensive goods. The CBAM aims to bolster the EU's Emissions Trading Scheme (ETS) and mitigate carbon leakage.

Why do we need the CBAM?

The European Union has been progressively intensifying policies and regulations in an effort to reduce emissions and to work towards achieving its climate change targets, which include reducing emissions by at least 55% by 2030 and achieving climate neutrality by 2050. 

A cornerstone of the EU's strategy to achieve these ambitions is the EU Emissions Trading Scheme (EU ETS). According to the European Commission, the ETS is “a key tool for reducing greenhouse gas emissions cost-effectively. It's the world's first major carbon market and remains the biggest one.” 

The ETS works by assigning a cost to carbon dioxide emissions (known as carbon pricing) which incentivises the reduction of emissions. Under the scheme, companies can buy or receive carbon allowances corresponding to their carbon emissions, which in effect makes using carbon-intensive energy sources like fossil fuels even more expensive, and makes switching to clean energy sources much more attractive. 

The EU sets a cap on how much carbon dioxide can be emitted annually, and this cap decreases with every passing year. Companies must have enough carbon allowances to cover their annual emissions. If their emissions surpass the amount covered by their allowance they will be fined. Conversely, if they release less greenhouse gases than their allowances, they can sell their excess carbon allowances. 

It's worth noting that free allowances have been issued under the ETS to safeguard the competitiveness of certain energy-intensive industries. However, these free allowances will be gradually phased out from 2026 through to 2034. 

Since its inception in 2005, the ETS has helped to reduce emissions in energy-intensive industries such as power generation and manufacturing by around 35%. However, the success of the system is tempered by something known as ‘carbon leakage'. 

Explore in our upcoming blog “Phenomenon of Carbon Leakage and The EU’s CBAM”