CBAM for chemicals, just not yet.
The EU’s Carbon Border Adjustment Mechanism (CBAM) is the EU's tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
The fear for carbon leakage for industries in EU is real. The chemical industry is already considered at high risk of carbon leakage today due to its high trade and energy intense processes.
What does carbon leakage mean in relation to Carbon Border Adjustment Mechanism?
Carbon leakage is the risk that industry moves from EU to countries with lower environmental standards or that the EU market gets flooded with carbon intensive goods.
What is the logic behind the Carbon Border Adjustment Mechanism?
The aspiration of the Carbon Border Adjustment Mechanism is that it will spur green ambitions in countries and create a global shift to a more sustainable industry, preventing carbon leakage.
In July 2021, the European Commission adopted a proposal for a Carbon Border Adjustment Mechanism (CBAM) as part of part of the EU’s ‘Fit for 55’ policy package. The CBAM, which is a supplementary measure to the EU Emission Trading System, operates by imposing a charge on the embedded carbon of certain imports, which is equal to the charge imposed on domestic goods under the ETS, with adjustments being made to this charge to consider any mandatory carbon prices in the exporting country.
In the first round, chemicals were not part of the first phase of the CBAM, which is covering iron, cement, steel, aluminium, fertilizers, electricity and hydrogen in first place. Nevertheless, all sectors of the economy will need to comply in the long run. Broadening the scope of CBAM and accelerating the removal of free allowances will, therefore have a more significant impact on both EU and non-EU businesses across the value chain. The CBAM intends to gradually replace the EU ETS free emissions allowances mechanism, by means of a 9-year phasing-out of the free allowances under the EU ETS from 2026 to 2034.
On 22 June 2022, the European Parliament adopted amendments to the Commission’s proposal for the Carbon Border Adjustment Mechanism (CBAM) to include organic chemicals, hydrogen, ammonia and plastics.
What are the consequences of the inclusion of the chemical sector under CBAM?
Including base chemicals in the scope would, on one hand, see an overall reduction of direct carbon leakage risks, but on the other hand, it will increase indirect carbon leakage risks for downstream products.
A study on the inclusion of the chemical sector in CBAM commissioned by the Dutch Ministry of Finance recommended that instead of including an entire group of organic chemicals, polymers or plastics, an alternative is to include specific chemical value chains where the positive impact of CBAM to reduce carbon leakage risks is optimized.
“CBAM proposal would need to be amended towards a comprehensive solution resolving four key issues: the inclusion of indirect carbon costs, coverage of full downstream value chains, assurance of export competitiveness and a workable implementation are crucial.”
At this point in time in 2024, during the transition phase, companies affected are expected to just report but from 2026 they will need to comply. This is a turning point for Europe and the rest of the world.
