“FIT for 55” and levies on CO2 imports – what do they have to do with each other?

What sounds at the beginning of the new year of 2023 like a fitness program for people of the baby boomer generation or the advertising slogan for a fitness studio, turns out on closer inspection to be a fitness program for European climate and energy policy. Presented and determined by the EU on July 14th of 2021 in implementation of the Paris Climate Agreement of 2015, the goal is to reduce the net greenhouse gas emissions in the EU by 55 percent by 2030 compared to the base year 1990.

What will be tackled?

In addition to the adaptation of existing EU directives and EU regulations, the “FIT for 55” provides for the adoption of new legal regulations:

• A new EU forest strategy
• A separate emissions trading system for the buildings and transport sectors (ETS 2)
• A Carbon Boundary Adjustment Mechanism (CBAM).
• A Climate Social Fund
• ReFuelEU Aviation – on the design of sustainable aviation fuels.
• FuelEU Maritime – on the design of sustainable fuels for maritime shipping.

The Carbon Border Adjustment Mechanism (CBAM) plays an important role in this context. Since there is currently no global CO2 pricing, but CO2 emission allowances are traded in the EU under the Emissions Trading Scheme (“ETS”), this puts European companies in CO2-intensive industries at a competitive disadvantage compared to companies in the same industry that do not have to pay CO2 taxes, since they have to spend a lot of money on the allowances. This also poses the risk that European companies will relocate their production to countries outside the EU whose climate policies are perceived as more “business-friendly”.

In order to compensate for this competitive disadvantage as well as to minimize the risk of CO2-intensive companies leaving the EU, CBAM shall eliminate disadvantages and risks for European companies in CO2-intensive industries by levying a proportional CO2 duty on imports. The CBAM border adjustment mechanism is intended to mimic a global CO2 price for European companies, i.e., the level of the CO2 duty is to be based on the pricing for European CO2 allowances. A refund of CO2 duties paid for European companies exporting to countries that do not charge a CO2 price or charge a lower CO2 price was also discussed.

Current developments

On December 13, 2022, the negotiators of the 27 EU member states reached an agreement on the content of the CBAM regulation, which according to current information includes the following:

1. Importers of covered products into the EU will be required to purchase CO2 allowances at a price equal to the price for CO2 emission allowances that an EU-based company would have paid under the EU Emissions Trading Scheme (ETS). The levy level is to be determined by the average weekly price of EU emission allowances (EU ETS) per metric ton to reflect the CO2 price as accurately as possible. Importers who have already paid a price for CO2 in the country where the imported product was produced will be able to deduct the corresponding costs. However, this deduction should not be possible for imports from countries that do not impose a carbon tax, even if those countries take other measures to reduce carbon emissions, such as imposing carbon limits.

2. As a first step, starting probably in October 2023, CBAM will apply to importers of:
   • Cement
   • Iron and steel
   • Aluminium
   • Fertilizers
   • Electricity
   • Hydrogen

In addition, certain intermediate products and a limited number of downstream products such as screws, bolts and similar items made of iron or steel will be covered by CBAM. It is also planned to consider applying CBAM to a broader range of products, including organic chemicals and polymers, in a transitional phase that will last until December 2026 at the latest.

3. From the start of the introductory phase in October 2023, importers of the products covered are to calculate and document the direct and indirect emissions generated in the production process of the imported goods. Furthermore, they are to submit the so-called CBAM report on a quarterly basis, in which they present the import quantity of direct and indirect CO2 emissions emitted in the country of origin and the CO2 price paid for this. During the introduction phase, a CO2 duty is not yet payable on the imported goods.

4. By January 2027 at the latest, CBAM is to take full effect, i.e., from that date on, the obligation to pay a CO2 levy as described above will be introduced gradually over a period of nine years. In addition to this payment obligation, importers are to have other tasks to fulfill:
   • they must request for CBAM filing authorization to the CBAM authority at the place of establishment;
   • they need to calculate of direct and indirect emissions associated with the imported product;
   • the stated data on direct and indirect emissions must be certified by an accredited testing body;
   • purchase the appropriate number of CBAM certificates from the appropriate CBAM authority;
   • The drafting and submission of an annual CBAM report by May 31 of each calendar year for the emissions associated with the previous calendar year’s imported goods. The corresponding number of CBAM certificates must also be submitted by this deadline.

Next steps

For the CBAM Regulation to enter into force as outlined above, it must be formally approved by the Council of the EU (in which the EU governments are represented) and the European Parliament. This is expected to be the case in late March / early April 2023. 20 days after publication of the approved text version in the Official Journal of the EU, the CBAM Regulation will enter into force.