Both the European Union (EU) and the U.S. have recently taken steps toward implementing some form of a carbon border adjustment mechanism (CBAM). Several countries and the EU have long considered enacting legislation that imposes a fee on carbon-intensive goods to reach their own climate goals while protecting domestic industry. Carbon border adjustment mechanisms seek to accomplish this goal by imposing a carbon fee on imports of certain products from countries without equivalent greenhouse gas (GHG) reduction mechanisms for the relevant product or sector. This week, the EU took a key step towards implementing a CBAM for EU member states that could apply to imports of certain products from the U.S. and other countries that have GHG reduction programs that are less stringent than those imposed within the EU, such as the EU Emissions Trading System (EU ETS).

Key Takeaways

• On December 13, 2022, the Council of the European Union and the European Parliament reached a provisional agreement on the CBAM.

• The Biden Administration drafted a concept paper that seeks to promote trade in “green metals” (i.e., those that are produced with less carbon emissions).

• Over the past several years, various lawmakers have floated similar CBAM mechanisms in the U.S. These could resurface following the implementation of a CBAM program in the EU or other major trade partners.

European Union Carbon Border Adjustment Mechanism

The CBAM will work with the EU ETS to reduce greenhouse gas emissions by targeting imports of carbon-intensive products. It is one of several EU programs dedicated to reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and achieving climate-neutrality by 2050.

The CBAM will initially cover the following products: iron and steel, cement, fertilizers, aluminum, electricity, hydrogen, and certain precursors. After a transition period, the Commission will determine whether to expand the scope of the CBAM to include other goods, such as organic chemicals and polymers. The long-term goal is for CBAM to cover all products listed in the EU ETS. Companies importing these products into the EU will have to purchase sufficient CBAM certificates if they exceed EU emissions standards to account for the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS. The price of the CBAM certificate will vary depending on the price of CO2 in the EU.

The Council and Parliament must formally approve the agreement before it takes effect. According to the provisional agreement, the CBAM rules will apply beginning October 1, 2023, with a transition period. For the first three years, producers will only be required to report the emissions of their products. After that, they must purchase CBAM certificates.

The CBAM intends to encourage producers to reduce their greenhouse gas emissions in manufacturing. Producers who trade with the EU have the choice to reduce their emissions or pay the price of CBAM certificates. The CBAM applies equally to all goods imported into the EU, which will, ideally, prevent carbon leakage (i.e., when producers relocate their practices to countries with less stringent environmental policies).

U.S. Carbon Border Adjustment Developments

Earlier this month, prior to the passage of the EU provisional agreement, the Biden Administration, through the Office of the U.S. Trade Representative, sent a “concept paper” to the EU, proposing a trade agreement that would create a global “club” of countries seeking to reduce carbon emissions. The paper proposes imposing tariffs on metals with higher carbon emissions, such as steel and aluminum from countries outside the club. These efforts are intended to encourage trade in metals produced with less carbon emissions.

In addition to efforts from President Biden, Congress also considered carbon border adjustment developments in the United States. In June 2022, Senator Whitehouse introduced the Clean Competition Act as a CBAM aimed at reducing greenhouse gas emissions from carbon-intensive sources. It would go further than the EU CBAM and impose a fee for emissions on domestic manufacturers as well as importers. In 2021, Senator Coons and Representative Peters introduced companion bills called the FAIR Transition and Competition Act, which would impose border carbon adjustment fees on imports of carbon-intensive goods into the U.S. As of now, these bills have stalled in Congress, likely due to a lack of bipartisan support. B&D continues to track national and global developments on carbon border adjustment developments.