EU Council agrees on general approach on carbon border charge

The EU Council has agreed on a common approach on the European Commission's proposed Carbon Border Adjustment Mechanism, it said March 15.

The agreement by EU member state governments is a key milestone in the proposal becoming adopted under law.

The CBAM seeks to place a charge on the carbon content of certain goods imported into the EU, and the Council agreed that it should cover electricity, iron and steel, aluminum, fertilizers and cement -- in line with the EC's July 2021 legislative proposals.

"The agreement in the Council on the Carbon Border Adjustment Mechanism is a victory for European climate policy," said Bruno Le Maire, French minister for economic affairs, finance and recovery.

"It will give us a tool to speed up the decarbonization of our industry, while protecting it from companies with less ambitious climate goals," he said in an EU Council statement.

The main objective of the CBAM is to avoid carbon leakage, the offshoring of carbon-intensive production to jurisdictions with unpriced carbon. It also aims to encourage partner countries to establish carbon pricing policies to reduce greenhouse gas emissions.

The CBAM is designed to function in parallel with the EU Emissions Trading System to "mirror and complement its functioning on imported goods," the Council said.

"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," it said.

Greater centralization

The Council's view was broadly aligned with the EC's July 2021 proposal, with limited differences. For example, the Council opted for a greater centralization of the CBAM governance, with a new registry of CBAM importers to be centralized at the EU level, rather than by individual member states.

The Council also included measures that appear to be aimed at avoiding negative impacts on small businesses.

"The Council also foresees a minimum threshold which exempts from the CBAM obligations consignments with a value of less than Eur150 [$165]," the Council said.

"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," it said.

Under the EC's proposal, the price of CBAM certificates would be closely linked to carbon allowance prices under the EU ETS.

EU Allowance prices for December 2022 delivery rose to an all-time high of Eur96.33/mtCO2e Feb. 7, according to Platts assessments published by S&P Global Commodity Insights.

Prices crashed to as low as Eur58.19/mt March 7 in the wake of Russia's invasion of Ukraine which began Feb. 24, but have since clawed their way back to Eur78.23/mt at the close March 14, according to Platts assessments.

Free allocation of allowances could be reduced by around 25% between 2026 and 2030 as a result of the CBAM, compared to a scenario where it is not applied, according to S&P Global Commodity Insights' Platts Analytics.

The tightening of free allocations over the course of the 2021-2030 fourth trading phase "will continue to support uplifted EUA prices in the longer term," it said in a report March 1.

Outstanding issues

The Council has yet to make sufficient progress on a number of issues which are closely related to the CBAM, but which are not part of the draft legal text, it said.

This concerns in particular the phase-out of free carbon allowances for industrial sectors under the EU ETS which are covered by the CBAM, and on limiting potential carbon leakage from EU exports.

These need to be resolved to ensure the CBAM's economic efficiency, environmental integrity and WTO compatibility, the Council said.

The Council will also continue to follow discussions on other issues such as the use of revenues from the sale of CBAM certificates and the need for greater international cooperation with third countries, including a so-called 'climate club' where carbon pricing policies can be discussed and encouraged, it said.

"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," it said.