European Commission Presents Proposal for Carbon Border Adjustment Mechanism ("CBAM")

On July 14, 2021, the European Commission ("Commission") presented its final proposal for a regulation establishing a European Union ("EU") Carbon Border Adjustment Mechanism ("CBAM") as part of a broader package of climate change-related legislation, the "Fit-for-55 Package." The essence of the CBAM is the same as that in earlier leaked drafts (see our June 10, 2021, Legal Update, “Informal Draft of European Commission Proposal for Carbon Border Adjustment Mechanism (‘CBAM’) Becomes Public”), but there are several important changes—notably in respect of the institutional framework for the CBAM implementation and the transitional period envisaged by the Commission.

The CBAM’s core remains the adoption of a requirement to surrender "CBAM certificates" that reflect the carbon price of the embedded emissions in the covered products that are imported into the EU. This requirement applies in respect of imports of cement; electricity; certain fertilizers; and certain iron, steel and aluminum products ("the covered products") from non-EU countries, except countries covered by the EU emissions trading scheme ("EU ETS"), i.e., Iceland, Liechtenstein, Norway and Switzerland. Importantly, in order to enhance the compatibility of the proposal with the EU’s obligations in the World Trade Organization ("WTO"), a mechanism is foreseen whereby other third countries can apply for their exclusion from the CBAM if they have an equivalent domestic carbon pricing mechanism.

The CBAM should work in parallel with the EU ETS by applying a carbon price to imported goods that is equivalent to the carbon price that is applied to goods manufactured in the EU as a result of the EU ETS. Only "authorised declarants" will be permitted to import the covered products. They will need to report on the embedded emissions in the imported covered products on an annual basis and will need to surrender a corresponding amount of CBAM certificates.

Third country producers are responsible for communicating information about the embedded emissions for covered products to EU importers. Operators and installations in third countries may register under the CBAM, and the verified information on the embedded emissions of such operators and installations may be used by authorized declarants as the basis for their own declaration. Where actual emissions cannot be determined, default values are to be used.

The mechanism will initially only have a "reporting obligation" that will apply from January 1, 2023, to December 31, 2025. The definitive version of the CBAM and the requirement to surrender CBAM certificates will only start to apply as of January 1, 2026, at the earliest. This marks a significant change as compared to earlier drafts of the proposal that leaked to the public and reflects the intention of the Commission “to facilitate a smooth roll out of the mechanism” and to reduce “the risk of disruptive impacts on trade.”

The implementation of the CBAM involves a significant role for the national authorities of EU member states, who will be responsible for authorizing declarants, reviewing and verifying declarations, and selling CBAM certificates to importers. The Commission will act as a "central administrator" responsible for recording the purchase and sale of CBAM certificates, holding and surrendering them, and carrying out of "risk-based controls on transactions." Leaked drafts had foreseen the creation of a separate "CBAM authority," but this entity has—at least in name—disappeared in the proposed CBAM Regulation.¹

In terms of next steps, the CBAM Proposal will be subject to review and modification by the European Parliament and the Council of the European Union (with input from civil society, trade organizations and other private sector participants). Therefore, the definitive CBAM Regulation may still change in terms of product or geographical scope and transitional periods, although it is unlikely that the actual form of the CBAM will be changed.

Exporters and importers of the products covered by the CBAM proposal should therefore start preparing for an increase in the administrative burden relating to imports. This applies already in respect of the transitional phase, even if no actual CBAM certificates will have to be surrendered during this period.

Mayer Brown has a wealth of experience in advising not just on emissions trading but also on the policy and regulatory aspects of the EU ETS. This, together with our leading trade practice, positions us well to advise on the intricacies of the proposed CBAM.

¹ The Commission Staff Working Document annexed to the CBAM proposal still makes reference to the concept.