CBAM - What is the Carbon Border Adjustment Mechanism?

What does CBAM mean?

CBAM Stands for Carbon Border Adjustment Mechanism. Behind this unwieldy name lies an intelligent system devised by the EU. The system applies to the import of goods into the EU.

When products produced in non-EU countries are imported into the EU, a screening process determines if they were produced in accordance with European climate standards (in terms of CO₂ emissions). In other words, it is determined if an appropriate compensation payment has been made for the CO₂ emissions involved in producing the goods.

If this is not the case, a CO₂ price is levied at the border for the import of such goods.

What is the purpose of the CBAM?

The EU has introduced the CBAM so that European companies that commit to climate protection and pay a CO₂ price are not put at a disadvantage to their non-EU competitors. The EU Emissions Trading Scheme applies to European companies in the coal, metal, cement and lime, and chemical industries.

Companies in these industries pay a CO₂ price via EU emissions trading if they produce goods with CO₂ emissions. In order to operate sustainably, this increases the production costs for these companies in the EU Emissions Trading Scheme in the short term. Of course, these production costs will fall again in the long term if they switch to more environmentally friendly production and emit less CO₂. This is the aim of EU emissions trading - to promote a sustainable economy as a guideline.

Now you might think that if companies in the EU pay a carbon price and companies in non-EU countries do not, then that is unfair. After all, if companies from other countries import goods into the EU and do not produce sustainably, they can charge lower prices. This is a difficult situation for European companies. They might then consider relocating their production to other countries to compensate for this disadvantage. This is called carbon leakage.

The CBAM was created to prevent this from happening. All products imported to Europe must now pay the same CO₂ price. This means that European companies are no longer at a disadvantage, and can offer their products competitively on the international market. If the CO₂ price for a product from another country is only 10 euros, but is 75 euros in Germany, then the difference must be paid at the border. This means that the non-European company’s CO₂ price will increase from 10 to 75 euros (when selling in Europe).

Which products are affected by the CBAM?

The following product groups are affected:

• Iron and steel
• Aluminum
• Cement
• Fertilizers
• Electricity
• Hydrogen
• Some upstream and downstream (especially iron and steel) products

*By January 2030, it will be evaluated whether chemicals and polymers and other downstream products are also affected by CBAM.

As you can see, these are the same energy-intensive product groups that are covered by EU emissions trading. This ensures that companies that participate in EU emissions trading do not suffer any disadvantages on the EU market.

How does the CBAM work?

1. Determine emissions Companies participating in the CBAM must prove how many CO emissions were generated during the production of their goods. This means that they must document the carbon footprint of their goods in detail.
2. Purchase CBAM certificates Companies must purchase certificates in the amount of their calculated carbon footprint.
3. Present CBAM certificates These certificates must be presented at the border. Otherwise penalty duties will be charged.

When does the CBAM take effect?

The CBAM is being rolled out in stages. The first phase, a pilot phase, started on 01.10.2023 and will run until 31.12.2025. Only the reporting obligation applies in this phase. Payments do not yet have to be made. The aim of this phase is to gain experience.

The CBAM will take full effect in 2026. Starting then, companies will have to acquire the necessary certificates.

The three most important steps towards CBAM implementation are:

• October 1, 2023: The transition phase starts (CBAM reporting obligation)
• January 1, 2026: CBAM starts in full, i.e. the cost burden increases over the following years
• 2034 (estimated): Full cost burden

Conclusion on the introduction of the CBAM

The CBAM ensures fair competition. It ensures that imported goods pay the same CO₂ price as goods produced in the EU.

The CBAM helps to protect the economy in the EU. Different climate regulations in other countries are aligned with European standards through the CBAM.

Mohammed Chahim, Vice-Chair of the Group of the Progressive Alliance of Socialists and Democrats in the European Parliament says about CBAM (December 2022):

CBAM will be a crucial pillar of European climate policy. It is one of the few levers we have to incentivize our trading partners to decarbonize their manufacturing industry. Moreover, it is an alternative to our current carbon leakage measures. This makes it possible to apply the polluter pays principle to our own industry. A win-win situation.