EU carbon ‘tax’ system comes into force

On 17 August 2023, the European Commission adopted the final implementing rules of the so-called Carbon Border Adjustment Mechanism for the initial transitional phase, which starts on 1 October 2023 and runs until the end of 2025. Carbon tax payment obligation to be started as of 2026.

The Carbon Border Adjustment Mechanism (CBAM) formally entered into force on 17 May 2023. It requires importers to report the so-called 'embedded emissions' of certain (mostly industrial) products and of electricity imported to the EU in order to ensure equivalent ‘carbon pricing’ for imports and domestic (i.e., EU) products and electricity.

As part of the EU’s Green Deal CBAM aims to stop the so-called "carbon leakage", a trend that European manufacturers might relocate their factories to third countries where they can produce significantly cheaper in the absence of strict EU environmental and climate regulations (but in full compliance with international trade rules) by practically introducing a carbon tax system of non-EU, carbon-dioxide emission heavy products - iron and steel, cement, fertiliser, aluminium and electricity generation - when entering the EU. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country (if any), the corresponding cost can be fully deducted for the EU importer.

The gradual introduction of the CBAM is aligned with the phase-out - between 2026 and 2034 - of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry, as follows. On 1 October 2023 a transitional phase of the CBAM will start, during this transitional period by the end of 2025, stakeholders will be required to provide information - without any associated financial adjustments - and to report on products whose production involves high carbon dioxide emissions and therefore a high risk of carbon leakage.

The newly introduced Implementing Regulation on reporting requirements and methodology provides for some flexibility when it comes to the values used to calculate embedded emissions on imports during the transitional phase. During the first year of implementation, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method); (b) reporting based on equivalent  third-country national systems; or (c) reporting based on reference values.

As of 1 January 2025, only the EU method will be accepted. As of 1 January 2026, following the final introduction of CBAM importers will be required to report the volume of goods imported into the EU in the previous year, as well as their greenhouse gas emissions and ‘pay’ the carbon (border) tax via the corresponding number of CBAM certificates.