Carbon border adjustment fee to be introduced in 2026

Commissioner Gentiloni presented the Carbon Border Adjustment Mechanism (CBAM) today (15 July) aimed at addressing the risk of carbon leakage, which would give other countries with less ambitious environmental targets a price advantage. 

The CBAM is one of thirteen proposals presented yesterday (14 July) aimed at reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Achieving these emissions reductions required by the recently finalized European Climate Law requires fundamental transformations for different sectors and tools to change behaviours of industry and consumers. 

Many EU businesses are already subject to the EU's Emissions Trading System (ETS), but as long as industrial installations outside the EU are not subject to similarly ambitious measures, these efforts can lose their effect. CBAM aims to equalize the price of carbon between domestic products and imported goods for certain energy-intensive sectors.

Like the ETS, the CBAM will be based on certificates the prices of which correspond to the embedded emissions in imported goods. The Commission hopes that this will incentivise others to ‘green' their production processes and also encourage foreign governments to introduce greener policies for industry.

There will be a transitional period, which will last from 2023-2025, CBAM will apply to the iron and steel, cement, fertilizer, aluminium and electricity sectors. In this phase, importers will only have to report emissions embedded in their goods, without paying a financial adjustment. This will give time to prepare for the final system to be put in place in 2026, when importers will need to buy certificates that can be offset against embedded emissions. This coincides with the phasing out of free allowances under the ETS. 

The Commission has been at pains to describe the new mechanism as an environmental policy tool, not a tariff instrument. It will apply to products, not countries, based on their actual carbon content, independently of their country of origin.

Gentiloni reported that finance ministers and central bankers meeting as the G20 in Venice received the EU proposal positively and with interest. He said that similar carbon pricing measures were under discussion including in the US and Canada.

WTO compatible?

Brazil, South Africa, India, and China have already expressed “grave concern” that CBAM could impose unfair discrimination on the import of their products. Ex-WTO Chief Judge James Bacchus writing in a blog for the World Economic Forum wrote: “To prove that CBAM is entitled to the WTO’s general exceptions, the European Commission would have to establish that it will not be ‘applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail’. And in addition, that it is not ‘a disguised restriction on international trade’.”

In order to reassure non-EU states, Bacchus suggests that it enters into dialogue with all stakeholders, the Commission’s proposal also includes a possibility of financial support in the form of technical assistance to help developing countries adapt to the new obligations.

Own resource?

The EU’s Next Generation EU fund which permits the EU to borrow €750 billion from financial markets will be funded by new own resources. CBAM is listed as one of the new sources of income, however it is estimated to make a very small contribution at only €10bn in revenue by 2030 and only 20% of this will be go to the EU. EU Reporter has asked for clarification on these figures and is still awaiting a response.

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