European Commission Launches Draft on the Scope the CBAM and Updating Rule of Practice for Consultation!
As part of its strategy to meet climate goals under the European Green Deal, the European Union has launched the Carbon Border Adjustment Mechanism (CBAM). This mechanism aims not only to prevent carbon leakage, but also to maintain the competitiveness of European industry during the green transition and to contribute to the global fight against climate change.
During the transition period of the CBAM, which started in October 2023, the focus was on basic products with the highest risk of carbon leakage and high carbon intensity, but over time, there have been discussions that this scope may not be sufficient to fully prevent carbon leakage. In particular, the European Commission's impact assessment reports highlighted the risks that firms may shift their production to less environmentally regulated countries to avoid carbon costs, or import downstream products containing these products to circumvent the regulation.
The initiatives undertaken within the framework of the CBAM, as well as the underlying policy needs, have prompted the European Commission to consider additional regulatory actions. In this context, the Commission recently launched a public consultation to explore the potential extension of the CBAM's scope. As part of the Commission's impact assessment, the consultation will be conducted between 1 July and 26 August, providing an opportunity for stakeholders both within and outside the EU to submit their views and contributions. The draft document and further details on the public consultation can be accessed here.
What are the implications of the process launched by the European Commission and the draft opinion it has published? Which policy changes are being considered, and what might they mean for stakeholders at both the local and global level?
At its core, the process initiated by the Commission aims to address the structural issues outlined below.
- EU producers shifting the production of downstream products outside the EU to avoid high carbon costs;
- Substitution of products originating in the EU with imported products with higher embedded emissions; substitution of products covered by CBAM with minor modifications in countries outside the EU to circumvent the mechanism's obligations at the time of import;
- The default values used in the calculation of electricity emissions do not adequately reflect the de carbonization efforts of non-EU countries in the energy mix, and technical requirements that make it difficult to declare actual emissions create a disincentive.
The Commission is concerned about the risk of circumvention of the CBAM, where EU producers shift production to countries with lower carbon costs or where imported products with high carbon intensity displace EU products with relatively lower embedded emissions. In this context, scenarios to avoid financial obligations, such as processing covered products with minor modifications in non-EU countries into a downstream product and re-importing them to the EU, are considered a serious risk.
Currently, the CBAM covers key sectors and products such as cement, iron and steel, aluminum, fertilizer, electricity and hydrogen. However, the consultation draft reveals that the European Commission is considering extending the scope of the mechanism to prevent the risk of carbon leakage further down the supply chain. Accordingly, it is proposed to include downstream products, i.e. end-user products that are produced using downstream products, in the scope of the CBAM.
The selection of products to be included in the scope is expected to be based on criteria such as carbon leakage risk (especially the level of tradability and carbon cost of the product), the importance of embedded emissions and technical feasibility, just like the current scope of the CBAM. In this framework, downstream products with high iron-steel and aluminum intensity are expected to be among the priority targets for scope expansion.
On the other hand, options under consideration to address the risk of circumvention of the CBAM include the introduction of additional reporting obligations on the production technology and composition of products. If this proposal is adopted, importers may be required to provide more comprehensive data on their production processes to enable more detailed monitoring of the carbon content of products imported into the EU.
In addition to measures on the scope extension of downstream products and the risk of circumvention, the consultation also seeks views on the current rules on the default emission values used for electricity in the CBAM and the conditions for the use of actual emission data. The Commission noted that, unlike for other products, the calculation rule for electricity is currently based on the use of default values, which are largely based on fossil-based electricity generation and reflect the electricity pricing system within the EU, but assessed that this methodology leads to under-recognition of the de-carbonization efforts of non-EU countries in their energy mix under the CBAM.
In particular, the technical requirements for the definition of power purchase agreements (PPAs), network congestion and capacity nomination are complex and often unaffordable in practice, significantly weakening the incentives to invest in decarbonized generation in non-EU countries. As a solution to these problems, options such as revising the default value methodology, clarifying the definition of PPA, simplifying the conditions for network congestion and clarifying the application of the capacity allocation criterion are being evaluated.
Overall, the extension of the scope of the CBAM to include user products and the introduction of technical amendments to prevent circumvention of the mechanism show that the Commission is committed to preventing carbon leakage more holistically. We believe that the planned changes to the methodology for calculating electricity emissions and the proposals to clarify the technical conditions for PPAs in particular may contribute to eliminating regulatory uncertainties and create a more predictable framework for renewable energy investments.
With the recent adoption of the Climate Law in Türkiye, the country has officially started setting up its own national Emissions Trading System (ETS). This step not only helps strengthen Türkiye's climate policy framework, but also clearly shows how the CBAM is starting to shape the actions of the EU's trading partners. Altogether, these developments point to the fact that CBAM is becoming more than just an internal EU tool—it's turning into a key driver of the global shift toward low-carbon production.
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