Since 2005, the EU's Emissions Trading System (ETS) has operated on the 'Cap & Trade' principle. An emissions cap is set, defining the total permissible emissions for installations covered by the system. Emission allowances are issued by member states via auctions or free allocations and can be traded freely, creating a price mechanism that incentivizes emission reductions. From 2013 onwards, the ETS expanded to cover nitrous oxide and perfluorocarbons.

This principle applies to CBAM certificates as well. To prevent companies from relocating production to countries with laxer environmental standards or replacing EU goods with more emission-intensive imports ('carbon leakage'), emission-intensive industries had previously received free certificates through allocation. Under CBAM, imports are taxed based on their carbon emissions, allowing free allocation certificates within the EU ETS to phase out gradually.

CBAM Key Features

CBAM considers both direct emissions from product manufacturing and indirect emissions caused by the production of inputs or electricity used during manufacturing. Initially, CBAM will apply to products susceptible to carbon leakage, such as aluminium, iron, steel, fertilizers, electricity, hydrogen, and cement, representing almost half the sectors covered by the EU ETS. Future expansions to encompass more products are anticipated.

Products Covered by CBAM:

Following a transition phase, importers must purchase emission certificates reflecting the ETS-equivalent price for producing goods within the EU. If a product already incurs a CO₂ fee abroad, these costs can be partially or fully offset against the CBAM certificate price, preventing double taxation and encouraging worldwide adoption of emission levies or taxes.

The supervision of CBAM-related imports rests with national customs authorities, while importers must calculate their CBAM obligations and maintain sufficient certificate stock to cover at least 80% of imported goods at any given time. The calculation of grey emissions depends on whether they stem from raw materials or benchmark values from the EU Commission for respective country groups. Purchasing certificates, linked to average weekly ETS auction prices, will be conducted via a central platform.

Unlike ETS certificates, CBAM certificates are not subject to a cap. Importers have until May 31 of each year to report previous-year CBAM emissions and surrender corresponding certificates. By June 30, they can return unused certificates, receiving reimbursement for up to a third of these, while surplus certificates expire.

Exemptions

CBAM applies to imports from countries outside the EU ETS unless those countries have an equivalent emissions trading system. Exemptions currently include Iceland, Liechtenstein, Norway, Switzerland, and territories like Büsingen, Helgoland, Livigno, Ceuta, and Melilla.

Timeline

CBAM registration began on January 1, 2025. During the transition phase until the end of 2025, only data collection on emissions from imported goods was required. Certificate purchases commence on January 1, 2026, phasing out free allocation by the end of 2034.

DIHK's Perspective

Fair competitive conditions both within the EU and globally are vital for energy-intensive industries like steel, aluminium, and cement. CBAM aims to combat relocation of CO₂ emissions to countries with limited carbon pricing mechanisms, providing certainty to affected industries.

However, the German Chamber of Commerce and Industry stresses the importance of ensuring EU climate ambitions do not disadvantage European businesses globally. The focus on imports neglects export competitiveness, as high CO₂ taxes on imported inputs could harm these industries on the world stage. A multilateral approach via agreements in the WTO or partnerships within climate-focused cooperation clubs would be more effective, avoiding unilateral measures which risk trade disputes and protectionism.

Additionally, CBAM procedures must align with established customs frameworks such as active inward processing and simplified customs declarations for businesses. To assist companies, the EU Commission should introduce a CBAM self-assessment tool and expand the Access2Markets webpage to include CBAM guidelines.