The European Commission has ambitious targets to reduce carbon emissions, but there is a risk that those emissions will be produced outside of Europe.

Last week, the EU announced the plans of its ‘Fit for 55’ package.

Among the plans are a carbon border adjustment mechanism (CBAM).

This mechanism is being put in place to prevent carbon leakage, so, as the EU works to decrease its emissions, this should not result in these emissions being produced in another part of the world.

Carbon leakage

Carbon leakage is often talked about in relation to methane production from the Irish beef and dairy herds when the argument is made that we produce beef and dairy products very efficiently.

The CBAM is being put in place to equalise the price of carbon between domestic products and imported products.

However, the mechanism is only being used on certain products.

How does the mechanism work?

Those exporting into the EU will be required to buy carbon certificates that will correspond to the carbon price that would have been paid if the goods were produced under the EU’s carbon pricing rules.

If the producer (non-EU) can show that they have already paid for the carbon used in production of these goods in a third country, the corresponding cost can be deducted for the EU importer.

The aim of the mechanism is to encourage non-EU producers to reduce the carbon footprints of the goods they produce.

What products does it apply too?

The CBAM will be introduced on a phased basis and will only apply to a certain number of goods which are at high risk of carbon leakage.

The CBAM will apply to: iron, steel, cement, fertiliser, aluminium and electricity generation.

When will it come into effect?

From 2023, a reporting system will come into effect and importers will begin to pay financial adjustments in 2026. This income will contribute to the EU’s budget.