CBAM Impact and How To Response

CBAM Impact and How To Response Presented by: Prof. Weishaar Date: 2 May 2024 Agenda - Impact - Responses What Emissions? - CO2, perfluorocarbons and nitrous oxide - Direct and indirect emissions - Transitional phase: reporting on actual direct and indirect emissions - As of 2026: CBAM will apply to direct emission and to indirect emissions embedded in CBAM goods that do not receive indirect cost compensation for electricity prices under the EU ETS (cement, fertilizers) - Commission report on extending CBAM to embedded emissions from transportation before 2026 Carbon Price, from 1 January 2026 - Equal carbon pricing • EU companies pay a carbon price via EU ETS on goods produced in the EU • Importers pay a carbon price, corresponding to the EU ETS price • The CBAM obligation only applies if EU ETS free allowances has been phased out Gradual phase in of CBAM obligation  Mirroring the phase out of EU ETS free allowances 2026 2.5 - 2027 5% No double pricing 2028 10% 2029 22.5% 2030 48.5% 2031 61% 2032 73.5% 2033 86% 2034 100% • An explicit carbon price paid in a 3rd country for the embedded emissions in imported goods will be deducted from the CBAM obligation Carbon Price Paid in 3rd Country - Explicit carbon price (Art. 3 (23) of CBAM Regulation) • 'monetary amount paid in a third country, under a carbon emissions reduction scheme, either in the form of a tax, levy, fee or emission allowances under a greenhouse gas emissions trading system, calculated on greenhouse gases covered by such a measure, and released during the production of goods' - In line with WTO rules, mirrors EU carbon pricing Transitional Period: Importers (1 October 2023-31 December 2025) - The Customs Declarant (the importer) reports embedded direct and indirect emissions • CBAM goods imported to the EU from 1 October 2023 • Report by each quarter; first report was due by 31 January 2024 • No verification of emissions • 'Effective, proportionate and dissuasive' penalty by national CBAM Authority on importer if not complying • Methodology and criteria for penalty in Implementing Regulation (2023/1773 of 17 August 2023) (10-50 Euros per ton of unreported emissions) • Reports submitted to EU Commission via the transitional registry  To gather data for forthcoming implementing acts for definitive period  'Learning by doing' period for business Definitive Period: Importers (from 1 January 2026) - Commission will lay down implementing rules on calculation methods for embedded emissions in a separate implementing regulation before 2026 - Goods can only be imported to the EU by an authorized CBAM declarant • Importer has to be established in an EU Member State • Authorization by the CBAM Authority in the Member State of establishment, demonstrating financial and operational capacity • - Application possible from 31 December 2024 Yearly declaration of CBAM imports during previous calendar year • By 31 May 2027 submit CBAM declaration for imports during 2026  Specifying embedded emissions according to laid down methodology  Ensuring that declared emissions are verified by an accredited verifier and include relevant verification reports  Calculating CBAM certificates to be surrendered • By 31 May surrender CBAM certificates covering declared emissions • Reviews of declarations by EU Commission and CBAM Authorities; noncompliance results in penalties - Purchase of CBAM certificates • 1 CBAM certificate equals 1 ton of embedded emissions in goods • Authorized CBAM declarants purchase at common EU auction platform • Price = average weekly price of EU ETS allowances • Upon purchase, CBAM certificates are registered in account of authorized CBAM declarant in CBAM Registry • No trading allowed between authorized CBAM declarants • An authorized CBAM declarant must ensure CBAM certificates for 80% of embedded emissions in his account by end of each quarter  Non-compliance may lead to revoking status of authorized CBAM declarant • - Limited possibility to re-sell surplus CBAM certificates to the EU COM. Ensure that an accredited verifier will verify the embedded emissions • Use person accredited as EU ETS verifier, or • A person may seek authorization by an EU Accreditation Body as an CBAM verifier. Role of a 3rd Country Producers - All legal CBAM obligations on the EU importer, not on 3rd country producer, but .... • The EU importer is obliged to give detailed info on embedded emissions in the imported goods • Access to data from the 3rd country producers needed for imports from 1 October 2023; from 1 January 2026 these data verification by an accredited verifier. - A 3rd country producer may register contact information and activity in EU CBAM Registry • To facilitate contacts between importers and 3rd country producers; possible already from 1 Oct. 2023 • The 3rd country producer shall ensure verification of embedded emissions. Option 1: Explicit carbon pricing - Retain money domestically! - Introduce ETS or TAX - ETS takes several years - Tax is easier => especially upstream carbon tax, capable of affecting both formal and informal sectors • Lack of administrative capacity! • Impact on domestic market • Repressiveness Option 2: Convert implicit to explicit pricing - General fuel duty => link to carbon content - Vietnam considers to integrate a carbon tax into existing environmental fees or the environmental protection tax Option 3: Tax only Carbon intensive exports - India considers to only tax exports - Taxing only exports to EU potentially problematic. - Measures must be WTO compliant Option 4: Export to non-CBAM States - Redirection of exports - Not consistent with decarbonization Option 5: Explicit tax & compensate - Tax carbon intensive export sectors - Recycle money back via (indirect) subsidies - Carbon price internalized - CBAM credit due - Competitive risks for EU industries Conclusion - СВАМ... • is coming! • contentious! (CBDR!!!) • is an environmental measure • needed to decarbonize EU industry • may not offer 'enough' protection to EU industries... true colors will show... • ...and importantly it is hitting like a bomb shell, forcing countries to actively think about carbon pricing and how to react