New EU legislative acts regarding Carbon Border Adjustment Mechanism (CBAM) and Emission Trading System (ETS)

Overview

On 16 May 2023 two important legal acts have been published in the Official Journal of the European Union, namely, Regulation (EU) 2023/956 establishing a Carbon Border Adjustment Mechanism (CBAM) and Directive (EU) 2023/959 introducing changes to the EU Emission Trading System (ETS). Both acts are milestones of the European “Fit for 55” package aimed at reducing greenhouse gas emissions by 55% until 2030 and achieving full climate neutrality in Europe by 2050.

Carbon Border Adjustment Mechanism (CBAM)

CBAM is designed to prevent “carbon leakage” from the EU to third countries with lower emission standards. This goal is to be achieved by gradual introduction of carbon tax for specific goods imported into the European Union thus ensuring equivalent carbon taxation as the one currently applicable for “domestic” goods under the ETS.

During a transitional period from 1 October 2023 to 31 December 2025 affected businesses and importers will have quarterly reporting obligations regarding emissions embedded in their imported goods. It is important to note that, as of January 2023, EU importers should have obtained the status “authorized declarants” in order to perform importation of goods within the scope of CBAM.

From 2026 onwards EU businesses will need to start purchasing CBAM certificates. In this regard, payment of CBAM charges will be facilitated through the purchase and subsequent surrender of the said certificates which will be priced based on weekly averages of ETS allowances auctions.

The list of goods subject to the CBAM has been significantly increased in comparison with the initial drafts and covers:

• Kaolin and kaolinic clays
• Cement and derivative products
• Fertilizers
• Iron ores and concentrates
• Various iron and steel products including downstream ones such as screws, bolts, nuts
• Aluminium structures
• Stranded wire, cables, plaited bands and similar items made of aluminium
• Hydrogen
• Electrical energy.

CBAM will not apply to goods originating in Norway, Liechtenstein, Iceland, and Switzerland as well as to low-value consignments under EUR 150.

It is important to note that specifics related to CBAM application (such as calculating embedded emissions and payments) will be subject to additional implementing legal acts which are expected to be published in 2023.

Emission Trading System (ETS)

An important development concerning the ETS includes the gradual phase-out of free allowances for carbon emissions currently granted to EU manufacturers. This reduction of granted free allowances will subsequently increase the manufacturing costs for businesses that do not implement changes to their current production modes.

Amendments to ETS provide for the following phase-out rate of free allowances:

Other major changes include extending the scope of ETS to the EU aviation and maritime sectors and introducing new ETS II covering fuels for transportation and heating.

Implications for businesses

CBAM and changes to the ETS will affect both European businesses and ones outside the Community. Exemplary steps for Bulgarian businesses include:

• Assigning internal responsibility for management of the regimes
• Identifying whether imported goods are covered by CBAM
• Preparing for transitional reporting requirements (e.g., conducting assessment in terms of data required on embedded emissions and carbon price at the location of manufacturing)
• Assessing current supply chains

Monitoring ongoing EU legislative developments such as implementing acts for CBAM.