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EU Economic and Financial Affairs Council Reaches Agreement on Carbon Border Adjustment Mechanism — Orbitax Tax News & Alerts

The EU Economic and Financial Affairs Council has announced that agreement has been reached on the proposed Carbon Border Adjustment Mechanism (CBAM) regulation during their meeting held on 15 March 2022. The CBAM was proposed by the European Commission in 2021 as part of proposals for the next generation of EU own resources. The objective of the carbon border adjustment mechanism is to reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes. It will essentially put a carbon price on imports corresponding to what would have been paid had the goods been produced in the EU.


Council agrees on the Carbon Border Adjustment Mechanism (CBAM)

Today, the Council reached agreement (general approach) on the Carbon Border Adjustment Mechanism (CBAM) regulation, which is one of the key elements of the European Union’s ‘Fit for 55’ package.

The main objective of this environmental measure is to avoid carbon leakage. It will also encourage partner countries to establish carbon pricing policies to fight climate change.

For that purpose, CBAM targets imports of carbon-intensive products, in full compliance with international trade rules, to prevent offsetting the EU’s greenhouse gas emissions reduction efforts through imports of products manufactured in non-EU countries, where climate change policies are less ambitious than in the European Union. It will also help prevent the relocation of the production or the import of carbon-intensive products.

The products of the following sectors will be covered by CBAM: cement, aluminium, fertilisers, electric energy production, iron and steel.

"The agreement in the Council on the Carbon Border Adjustment Mechanism is a victory for European climate policy. It will give us a tool to speed up the decarbonisation of our industry, while protecting it from companies from countries with less ambitious climate goals. It will also incentivize other countries to become more sustainable and emit less. Finally, this mechanism responds to our European ambitious strategy that is to accelerate Europe’s energy independence.

Bruno Le Maire, French Minister for Economic Affairs, Finance and Recovery

CBAM is designed to function in parallel with the EU’s Emissions Trading System (EU ETS), to mirror and complement its functioning on imported goods. It will gradually replace the existing European Union mechanisms to address the risk of carbon leakage, in particular the free allocation of EU ETS allowances.

Compared to the initial proposal by the Commission, the Council opted for a greater centralization of the CBAM governance, where it makes sense and contributes to greater efficiency. For example, the new registry of CBAM declarants (importers) is to be centralised at EU level.

The Council also foresees a minimum threshold which exempts from the CBAM obligations consignments with a value of less than €150. This measure would reduce administrative complexity, as around one third of consignments to the Union would fall under that category, and their aggregate value and quantity represents a negligible part of greenhouse gas emissions of total imports of such products into the Union.

Next steps

The Council still has to make sufficient progress on a number of issues which are closely related to CBAM, but are not part of the draft legal text of the CBAM regulation. This concerns in particular the phase-out of the free allowances allocated to industry sectors covered by the CBAM, established by the EU ETS directive, and appropriate solutions on the issue of limiting potential carbon leakage from exports, so that economic efficiency, environmental integrity and WTO compatibility of the CBAM are ensured.

Two other issues will continue to be followed:

  • the proposals by the Commission for own resources, based, inter alia, on revenues from the sale of CBAM certificates, which are under consideration for deliberation by 1 July 2022, in accordance with the inter-institutional agreement of 16 December 2020;
  • the Council noted the importance of greater international cooperation with third countries, including through the establishment, in parallel to the CBAM, of a climate club where carbon pricing policies can be discussed and encouraged.

Once sufficient progress will have been achieved at the Council, the Council will start negotiations with the European Parliament, after the latter has agreed its position.