The Council of the European Union (EU) has given the final legislative approval of establishing the bloc’s Carbon Border Adjustment Mechanism (CBAM) for imports of products in carbon-intensive industries and the revision of the bloc’s carbon market, known as the Emissions Trading System (ETS), after the European Parliament formerly adopted the legislation on April 18 (GM April 21, p. 27).
The Council on April 25 voted on three other key carbon tax policy laws in addition to the CBAM and ETS reforms. Some 23 of 27 Member States of the EU Council voted in favor of the reforms.
The reforms, in addition to establishing a CBAM, and changes to the EU ETS, including shipping under the ETS, were: the creation of a separate EU ETS (ETS II) for the construction industry and road transport fuel sector and specific changes to the aviation sector under the ETS, and the creation of a Social Climate Fund to help governments compensate vulnerable households and small businesses.
A CBAM transitional period ends in January 2026, after which companies are liable to pay carbon tax.
Until the end of 2025, the CBAM will apply only as a reporting obligation, starting from Oct. 1 this year. CBAM will be phased in gradually, in parallel to a phasing out of the free carbon allowances, once it begins under the revised EU ETS for the sectors concerned over a nine-year period between 2026 and 2034.
The CBAM measures under the initial scope of the legislation will apply to the fertilizers, cement, iron and steel, aluminium, electric energy production, and hydrogen sectors, as well as some precursors and a limited number of downstream products.
As of May 2022, there were nearly 1.45 billion allowances in circulation on the EU carbon market, according to a Dow Jones report, citing its Oil Price Information Service (OPIS). With this week’s approval of the EU legislation, nearly 420 million emission allowances will be removed from the EU carbon market by 2030. According to OPIS estimates, that is almost a 30% reduction in EUAs by 2030 from the EU’s 2021 carbon market supply.
The vote in the Council is the last step of the decision-making procedure. The laws will now be signed by the Council and the European Parliament and published in the EU’s Official Journal before entering into force.
The laws are part of the EU’s flagship “Fit for 55” climate policy package, which sets the EU’s policies in line with its commitment to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.