With negotiations stretching well into the early morning, representatives from EU nations and the European Parliament have managed to make significant progress on proposed ‘carbon tariffs’. An agreement on the ‘carbon border adjustment mechanism’ (CBAM) was reached, meaning that companies importing certain polluting products will be required to buy certificates to cover their embedded CO2 emissions. The scheme is designed to mirror the EU’s own domestic carbon pricing, thus protecting domestic EU industries from outside competition in the form of cheaper and more polluting products. “For the first time, we will ensure fair treatment for our enterprises, which pay a carbon price in Europe, and their foreign competitors, who do not,” said Pascal Canfin, the chairman of the European Parliament’s environment committee[i].
These CO2 emissions costs will initially affect imports of iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen. The law will form part of the EU’s wider strategy towards the objective of a climate-neutral EU by 2050, alongside the interim goal of at least a 55% reduction in net greenhouse gas emissions by 2030 (55% reduction when compared to 1990 levels)[ii]. The European Parliament’s lead negotiator, Mohammed Chahim, noted the importance of the measures in helping drive global change: “CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry,”[iii] he said.
Whilst imports of iron, steel, cement, fertilisers, aluminium and electricity had been targeted by the treaty since its inception last year, hydrogen has also been included as a late decision during these recent negotiations. The treaty was amended following findings in a recent EU paper that most hydrogen is, in fact, produced using methods which rely on the burning of coal. This issue (the concern that most hydrogen production was obtained through polluting means) is a subject we recently explored in our blog. In 2021, only a small portion of the world’s hydrogen was produced using so-called green and blue processes, which generate lower emissions compared to hydrogen produced using the more favoured method with coal. Further, recent trends from China sow doubt about a green hydrogen future- although China produces more hydrogen than any other country, its generation now produces significant levels of emissions. In 2020, for example, China produced 33 Mt of hydrogen, representing 30% of the global amount. Yet one-third of China's hydrogen production is powered by coal, which emitted roughly 360 Mt of CO2 in 2020. According to the IEA, China is the only nation in the world to produce hydrogen from coal on a considerable scale, making EU tariffs all the more crucial in perhaps changing the behaviour of others hoping to develop exports of the gas.
As noted, any companies importing those goods outlined within the treaty will have to buy certificates to cover the carbon emissions embedded in them unless they can prove they have already been accounted for by climate legislation in the producer country; this leaves scope for countries aligned to EU climate rules, or with similar legislation, as potentially being able to avoid a hit from the tariff. It is thought that the tariff will replace the much-criticised allowances that EU industries currently receive for free under the bloc’s carbon market, the Emissions Trading Scheme (ETS), according to Edie.net[iv].
The European Parliament also succeeded in including processed products, such as screws and bolts and similar articles made from iron or steel; this will likely lead to other ‘downstream’ products being added following a review carried out before the end of the transition period. The inclusion of organic chemicals and plastics will also be assessed before the end of the transition period. Further hopes to include ‘indirect emissions’ were a significant point of contention, and as such, the result is that these will be “included in the regulation in a well-circumscribed manner”[v] following further debate.
According to a statement from the European Council on timelines: “Under the provisional agreement, CBAM will begin to operate from October 2023 onwards. Initially, a simplified CBAM would apply essentially with reporting obligations only. The aim is to collect data. From then onwards, the full CBAM will kick in. It would be phased gradually, in parallel to a phasing out of the free allowances, once it begins under the revised EU emissions trading system (ETS) for the sectors concerned. This will ensure compatibility of CBAM with international rules on trade.”[vi]
[i] EU seals agreement on world’s first carbon tariff - edie
[ii] European climate law: Council and Parliament reach provisional agreement - Consilium (europa.eu)
[iii] https://www.reuters.com/business/sustainable-business/eu-seeks-deal-world-first-carbon-border-tariff-2022-12-12/
[iv] EU seals agreement on world’s first carbon tariff - edie
[v] EU climate action: provisional agreement reached on Carbon Border Adjustment Mechanism (CBAM) - Consilium (europa.eu)
[vi] EU climate action: provisional agreement reached on Carbon Border Adjustment Mechanism (CBAM) - Consilium (europa.eu)
Lauren has extensive experience as an analyst and market researcher in the digital technology and travel sectors. She has a background in researching and forecasting emerging technologies, with a particular passion for the Videogames and eSports industries. She joined the Critical Information Group as Head of Reports and Market Research at GRC World Forums, and leads the content and data research team at the Zero Carbon Academy. “What drew me to the academy is the opportunity to add content and commentary around sustainability across a wealth of industries and sectors.”
