You may have heard this term mentioned before. But what exactly does it mean? And why does the EU want to create a mechanism in carbon border adjustment? In the article below, we try to make you a little wiser about this new methodology.
CBAM stands for Carbon Border Adjustment Mechanism. So it refers to a carbon border adjustment mechanism. The EU is at the forefront of several efforts to combat climate change. Within the European Green Deal, Europe has set the ambitious goal of reducing carbon emissions by 55% by 2030, compared to reference year 1990. The end goal should be a climate neutral Europe by 2050.
So Fit for 55, a package of proposals to update EU legislation and adapt policies to meet EU climate goals. CBAM is part of the many proposals, which include, for example, emissions measures for agriculture, or new emission standards for cars and vans.
But why a carbon border adjustment mechanism? Since the EU is making huge efforts to meet its ambitious climate target, it wants to prevent production moving to non-EU countries where climate policies are less ambitious, or imports of carbon-intensive products increase substantially.
Currently there is a provisional and conditional agreement around CBAM within the Council and the European Parliament, which still needs to be ratified. Initially, CBAM will only apply to a number of carbon-intensive products, including, for example, iron, steel, cement and fertilizers. It also covers indirect emissions, which are clearly defined.
According to the tentative agreement, CBAM will take effect from October 2023. Initially, only a simplified CBAM will apply, with only reporting requirements. After that, the full CBAM will enter into force, which will be phased in. This will run concurrently with the elimination of free allowances for the sectors concerned.
For now, we cannot estimate whether there is going to be an impact on our applications. However, we have to take into account the possibility that the EU will collect carbon border corrections through import taxes. Producers of carbon-intensive products will have to report their CO2 or emissions within their production processes. In the transition phase until the end of 2025, embedded emissions will have to be declared without paying a financial correction. From 2026, the system will become permanent.
Stream Software is monitoring the whole thing closely and will of course build any necessary changes into the applications in a timely manner. We'll keep you posted!