Lawmakers at the European Parliament and members of the EU Council reached a late-night deal today on the establishment of a carbon tax on imported goods, aimed at equalizing the carbon price paid by European producers with those outside the EU, and avoiding undermining the EU’s actions to reduce product’s emissions with imports from countries with less ambitious climate policies.

Under the new agreement, the new EU Carbon Border Adjustment Mechanism (CBAM) will equalize the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) – the EU’s internal cap and trade carbon pricing mechanism – with that paid for products produced in other countries, with companies that import into the EU required to purchase CBAM certificates in order to make up the difference.

The primary purpose of the CBAM system is to avoid “carbon leakage,” a situation in which companies move production of emissions intensive goods to countries with less stringent environmental and climate policies.

A statement from the EU Parliament following the agreement said that the mechanism will also “incentivise non-EU countries to increase their climate ambition,” adding that, “only countries with the same climate ambition as the EU will be able to export to the EU without buying CBAM certificates.”

European Parliament Member Mohammed Chahim, said:

“CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry.”

CBAM will initially apply to specific products from carbon intensive sectors, including iron and steel, cement, fertilizers, aluminum, electricity, hydrogen, and some downstream products such as screws and bolts, as well as to some indirect emissions under certain conditions.

The mechanism will kick in beginning October 2023, and will be phased in over time, with importer obligations at first limited only to reporting of product emissions. Over time, the application of CBAM to other goods at risk of carbon leakage, such as organic chemicals and polymers, will be assessed, with the goal to include all goods covered by the EU ETS by 2030, and the possibility of including more downstream products as well.

The phasing in of CBAM will be done in parallel to the removal of free allowances that are currently in place enabling some sectors to avoid paying for carbon emissions under the EU ETS, ensuring that those sectors avoid “double protection” under the new system. According to the EU Parliament, CBAM is designed to be fully compliant with WTO rules.

The agreement is a major step towards the completion of negotiations for the European Commission’s “Fit for 55” roadmap – the EU’s proposed strategy to cut greenhouse gas (GHG) emissions by 55% by 2030, compared to 1990 levels – by resolving one of its most complex issues, and the one most likely to face opposition from countries and producers outside of the EU. Negotiations on the current agreement have been ongoing since July.

The agreement requires confirmation by ambassadors of the EU member states, and by the European Parliament, and remains provisional on the timing of phasing out of the EU ETS free allowances, which is still under negotiation.

Calling CBAM “a key part of our climate action,” Jozef Síkela, Minister of Industry and Trade of Czechia, said:

“This will ensure a balanced treatment of such imports and is designed to encourage our partners in the world to join the EU’s climate efforts.”