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16 March 2022

EU Finance Ministers reach agreement on EU Carbon Border Adjustment Mechanism

Executive summary

On 15 March 2022, the Council of the European Union (the council or ECOFIN) met to discuss the proposed European Union (EU) Carbon Border Adjustment Mechanism (CBAM). The draft regulation was adopted by a qualified majority.

Detailed discussion

In July 2021, the European Commission (the Commission) presented a draft CBAM regulation (see EY Global Tax Alert, European Commission releases proposal for a Carbon Border Adjustment Mechanism, dated 29 July 2021), intended to prevent carbon leakage whereby emission-intensive production is relocated to third-countries. A levy is to be applied on imports of products in certain product categories namely iron and steel, cement, aluminum, fertilizer and electricity. According to the Commission's proposal, the revenue is to flow into the EU budget as own resources.

The Council of EU Finance Ministers has now reached a general agreement on the draft. In comparison to the draft regulation, the text adopted on 15 March includes the establishment of a new authority for the administration of border compensation at the EU level and a de-minimis threshold of import shipments having a value up to €150 . The close integration with other legislative procedures that are part of the “Fit for 55” package and questions of international trade law need to be clarified, including the treatment of exports and phase out of free allowances granted under the EU Emission Trading System. Further changes to the text of the regulation are therefore not excluded and should be expected. It is also envisaged that the CBAM will be introduced in several stages, starting from 1 January 2023.

In contrast to the ordinary EU legislative procedures in the field of taxation with the unanimity principle, the European Parliament is not only consulted when it comes to CBAM regulation but it also has a right of co-decision. The European Parliament’s Committee on the Environment, Public Health and Food Safety (ENVI) also provided its recommendations on CBAM earlier this year (see EY Global Tax Alert, European Parliament provides recommendations on EU Carbon Border Adjustment Mechanism, dated 1 March 2022).

Implications

The expected changes may have a significant disruptive impact for emission and energy-intensive industries and businesses. It is critical to timely identify potential impacts, plan measures and have enough time to realize change before expected increases of direct and indirect carbon costs. Also, the new reporting requirements and administrative obligations require preparation well in advance. Businesses should proactively embrace the changes and prepare to align their business model to the expected carbon emissions framework.

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For additional information with respect to this Alert, please contact the following:

Carbon Border Adjustment Mechanism

Document ID: 2022-5279

 
 

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