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Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) is part of the European Union’s Fit for 55 package. It was presented on 14th July 2021 by the European Commission and serves as a tool to equitably price carbon emissions generated during the production of carbon-intensive goods entering the EU. It aims to incentivise clean industrial practices outside the EU while maintaining the region's climate objectives. By ensuring that imported goods have paid a price reflecting their embedded carbon emissions, CBAM establishes parity between imported and domestically produced goods in terms of carbon pricing.
The mechanism is introduced gradually and applies first to selected products at high risk of carbon leakage: iron, steel, cement, fertiliser, aluminium, electricity generation and hydrogen production. The products covered by the system would be both ‘simple’ and ‘complex’ goods. This means primary materials, as well as semi-manufactured goods that use primary materials as inputs. As to the emissions covered, direct emissions are taken into account for all sectors, while indirect emission are also covered, except in those sectors, where indirect cost compensations via state aid is in force, such as in the case of the hydrogen sector.
The scheme kicked off in October 2023 with a two-year transition period, until the end of 2025, during which importers will have to report emissions embedded in their goods. From 2026 onwards, a long phase-in of the CBAM will start, whereby it will gradually replace ETS free allowances as the EU’s tool to avoid carbon leakage, until the complete phase in of the scheme in 2034. In practice, this means that for instance in 2030 an EU-based producer of ammonia will only receive 50% of free allowances it would have received in the absence of CBAM, while concurrently, an ammonia importer will have to pay for about 50% of the total embedded emissions of its ammonia shipment.
What’s in it for hydrogen?
In general, the mechanism is expected to accelerate decarbonisation efforts both in the EU and abroad, by equalising the carbon price of domestic products and imports. With the progressive phase-out of free allowances under the ETS between 2026-2034, the industrial sectors covered by the mechanism will be subject to the full carbon price. This would create a stronger incentive to decarbonise industrial processes. Thus, the role of green hydrogen is expected to increase, especially in sectors where there are few other alternatives, such as in steel and fertilisers production.
However, there are certain issues with the CBAM framework for the well-designed coverage of the hydrogen sector. Firstly, although it is foreseeable that in the coming years a substantial portion of the imported renewable hydrogen by 2030 will be in the form of hydrogen carriers, only one of those carriers is included in the CBAM (ammonia), while others (e.g. methanol, e-kerosene) are omitted, which could have a distortive effect on the European market. Secondly, CBAM only covers a very limited number of downstream products (screws, bolts). This could put European-based manufacturers of electrolyser and fuel cell systems at a disadvantage vis-à-vis their international competitors.
After the start of the scheme in October 2023 with the transition period, importers of these select goods are obliged to report quarterly on the embedded emission of the products. The first deadline for this was at the end of February 2024. The precise methodology and guidance for such reporting in the transition phase is available, however the precise methodology regarding the implementation of the definitive phase is currently being developed by the European Commission, with the help of a CBAM Expert Group.
Links to the original document and additional information:
The CBAM Regulation in the EU’s Official Journal
Guidance Document on CBAM implementation for importers of goods into the EU
