On December 13, the European Parliament and the European Council agreed on the Carbon Border Adjustment Mechanism (CBAM), a new carbon leakage tool, to extend the scope to hydrogen, certain gas precursors and indirect emissions, and some downstream products.

On Tuesday morning, MEPs reached an interim agreement with the European Council to establish the EU's carbon border adjustment mechanism to combat climate change and prevent carbon leakage.

Under the agreement, the EU will establish a Carbon Border Adjustment Mechanism (CBAM) to balance the carbon prices of EU products and imports operating under the EU Emissions Trading System (ETS). This will be achieved through the mandatory purchase of so-called CBAM certificates from those importing products into the EU, to cover the difference between the carbon price of the producer country and the price of carbon allowances in the EU ETS.

Only countries with the same climate ambitions as the EU can export to the EU without purchasing certificates. The new rules will therefore ensure that EU and global climate efforts are not undermined by the shift of production from the EU to countries with less ambitious policies.

The new bill will be the first of its kind, coming into force from October 1, 2023, but with a transition period where importers' obligations are limited to reporting. In order to avoid double protection for EU industries, the length of the transition period and the full implementation of the carbon border adjustment mechanism will be linked to the phasing out of free allowances for EU emissions trading.

Under the Commission's proposal, the CBAM would cover steel, cement, aluminium, fertilizers and electricity, and extend to hydrogen, indirect emissions under certain conditions, certain precursors, and some downstream products such as screws and bolts and similar steel products.

Before the end of the transition period, the European Commission should assess whether to extend the scope to other commodities at risk of carbon leakage, including organic chemicals and polymers, with the goal of including all commodities covered by the EU ETS by 2030. They should also assess methods of indirect emissions and the possibility of including more downstream products.

The European Commission will be responsible for most of the tasks of the CBAM. By the end of 2027, the European Commission will undertake a comprehensive review of the mechanism, including an assessment of progress made in international negotiations on climate change and the impact on imports from developing countries, in particular LDCs.

This part of the agreement depends on the reform of the EU ETS. Before the new law can enter into force, the European Parliament and the European Council must formally ratify the agreement. The new law will enter into force 20 days after its publication in the Official Journal of the European Union.

The CBAM is part of the EU's Adaptation to 55% Reduction Package for 2030, which aims to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.