The Carbon Border Adjustment Mechanism (CBAM) is considered an extension of the European Union Emission Trading Scheme (EU ETS). The ETS regulates European countries, while the CBAM is designed for non-EU countries. Similar to the carbon tariff, importers who want to import products into the EU need to declare the quantity of goods and the amount of carbon emissions embedded in their products and surrender a corresponding amount of CBAM certificates by May 31 each year. A third-party verification of product carbon content is required, otherwise the EU default value (10% of the worst performance within the EU) will be used for calculation. If an importer has already paid the carbon price in the country of origin without any compensation (e.g., export tax rebate), the payable certificates can deduct the cost. Countries would have the opportunity to be granted exemptions from the CBAM if they have adopted a carbon reduction standard at least equivalent to the EU.
CBAM excludes countries and regions that have participated in the EU ETS or have links to the EU ETS (e.g., the European Economic Area and Switzerland).
The regulated industries are steel, aluminum, cement, fertilizers and imported electricity. Before the end of the transitional period, the Commission will determine whether the CBAM should expand the scope, such as the inclusion of the electronics industry, based on the assessment report.
Declaration schedule and content
Institutional operational relationship
Certificate price: The price of a CBAM certificate is determined by the average of the winning prices of the EU ETS auctions in the previous week and announced every Monday.
Number of certificates to be surrendered: The average closing price of weekly carbon auctions multiplied by GHG emissions (deduct carbon fees paid by exporting countries).
Importers are required to register and purchase CBAM certificates from EU-authorized agencies.
Importers are required to declare the quantity of goods imported into the EU in the preceding year and their carbon emissions by May 31 each year. Meanwhile, the importer must also purchase enough CBAM certificates in advance in the account.
There is no fixed number of CBAM certificates and no transaction between certificates, which is different from ETS allowances and not interchangeable.
Re-purchase mechanism: If the reserved certificates exceed the actual demand, it is allowed to request the CBAM competent authority to re-purchase them at their original price, and the re-purchase amount shall not exceed one third of the total purchase amount of the preceding year.
Cancellation: Any certificate remaining in the account after surrender and re-purchase will be cancelled by June 30 each year.
As of November 29, 2021, EUA was priced at 74.21 euros/tonne, a price increase of 120.27 % compared to January 2021 (EUR 33.69).
- Following the EU, the United States has also decided to introduce a system related to carbon border adjustment. In the future, more countries may implement similar schemes, or require declaration of carbon content for imported products. Enterprises must prepare as soon as possible.
- The draft CBAM is not compatible with WTO rules; therefore, the detailed rules are still to be formulated by the competent authorities.