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EU carbon border mechanism to require surrender of certificates: draft proposal

Highlights

Importers to require authorization by CBAM Authority

Certificates to be sold linked to EU carbon prices

CBAM price to be calculated using average carbon auction prices

A proposed EU Carbon Border Adjustment Mechanism will require companies importing carbon-intensive goods into Europe to surrender certificates based on their carbon content, according to a leaked draft legislative proposal seen by S&P Global Platts.

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Companies will be required to make a CBAM declaration setting out the embedded CO2 emissions in imported goods for each calendar year, according to draft documents.

The documents come ahead of an expected legislative proposal for a CBAM by the European Commission in July, in a controversial move that seeks to protect EU-based industries from carbon leakage – the risk of moving operations to avoid carbon costs.

The CBAM seeks to level the international playing field by protecting industry from competitive distortions linked to European carbon prices while also encouraging other countries to adopt equivalent climate protection policies.

Most emissions-intensive goods to be covered

As widely expected, the CBAM would apply to a raft of emissions-intensive sectors, including electricity, iron and steel, aluminum, cement, and fertilizers, according to the draft documents.

The documents suggested the CBAM could be introduced in a transitional phase from 2023, with further provisions to be finalized before Jan. 1, 2026.

Importers would need to apply for authorization and report their CO2 data to a CBAM Authority, according to the draft documents.

The CBAM Authority will sell certificates to authorized entities based on a calculation linked to carbon prices under the EU Emissions Trading System.

"The CBAM Authority shall calculate the price of CBAM certificates as the average of the closing prices of all auctions of EU ETS allowances conducted in auctioning platforms ... during each calendar week," according to the documents.

Importing entities will be required to surrender the appropriate number of certificates by an annual deadline of May 31.

Implications for wider trade agreements

EU officials have stressed that the CBAM proposal must be compatible with World Trade Organization rules, which require equal and fair treatment between goods produced domestically and those imported.

S&P Global Platts Analytics has warned that even if the CBAM proposal is deemed to be WTO-compatible, the EU will still need to work closely with its trading partners to avoid the policy spilling over into a wider trade dispute.

Further complications include the fate of free allowances to industrial sectors under the EU ETS, which effectively perform the same role as the CBAM and may need to be scaled back or removed in order to avoid claims of "double protection" for Europe's industries.

The CBAM proposal comes at a sensitive time in international climate negotiations, with the UK keen find agreement on raised climate ambition among countries ahead of hosting the COP26 United Nations climate talks in Glasgow in November.

If applied, the CBAM is expected to be less onerous for imports that have lower-carbon content, boosting demand for cleaner goods.

The urgency surrounding the CBAM has intensified as the EU carbon price surged to an all-time high of over Eur56/mt ($68/mt) in May as the EU gears up to realign the EU ETS annual carbon caps with the new tougher 2030 target to cut emissions by 55% below 1990 levels, compared with the existing 40% target.

EU officials recently said they are seeing signs that other countries are moving quickly on domestic climate policies to minimize their exposure to a potential EU carbon border charge.

Speaking in April, Russian President Vladimir Putin said Russia was considering providing special preferences to foreign companies willing to participate in joint projects on climate change and clean technologies.

One of the reasons Russia is fast-tracking its green investment program is the looming CBAM, which is expected to cost Russian exporters up to Eur6 billion ($7.2 billion) per year, Platts reported April 22.

Work on CBAM 'still ongoing': EC

When contacted, the European Commission said June 4 that it generally does not comment on leaked proposals.

However, an EC official said work on the proposals in the Fit-for-55 package is still ongoing inside the Commission and "no final decisions have been taken."

"The proposals are foreseen to be adopted on July 14," the official said.

"In her political guidelines, [European Commission] President von der Leyen put forward a proposal for an EU Carbon Border Adjustment -- a key tool which would help avoid carbon leakage if other international partners do not share the same level of ambition as the EU," the official said.

"The global challenges of climate change require a global response. The EU will continue to promote and implement ambitious environmental, climate and energy policies around the world."