The European Commission has published its draft implementing act defining the requirements to qualify for certain deductions to CBAM liabilities, 13 May, as part of a four week public consultation.
EU Carbon Border Adjustment Mechanism (CBAM) rules entitle importers to make deductions from their annual CBAM liability – charged on the basis of the emissions embedded in imported steels from their respective production processes – for carbon prices already paid on the goods in international jurisdictions.
As the CBAM seeks to equalise carbon costs for domestic and exporting producers selling in the EU, permitting deductions for carbon costs “effectively paid” ensures that a carbon price “is not paid twice on the same emissions” – important for defending legal challenges such as WTO compliance.
The draft implementing act and annex were published as part of a four week feedback period, open for responses between 13 May and midnight 10 June. The regulation details proposed rules on:
- determining relevant carbon prices “effectively paid,” and the use of default carbon prices;
- how different forms of “compensation” for said carbon prices can reduce what price was “effectively” paid, and how to factor these rebates into deductions;
- euro currency conversions, using yearly averaged exchange rates;
- evidence requirements on how carbon price deductions were rationalized;
- required qualifications for the “independent person” responsible for assessing and certifying said evidence.
As detailed in the draft documents, the Commission proposes to limit carbon price deductions to only those emissions relevant to CBAM liabilities, meaning deductions will only be possible where CBAM declarations are submitted using actual values due to common data and evidence requirements in mapping process emissions to the goods level. As with product emissions values, the Commission will in the future publish a set of “default carbon prices” for third countries with their own carbon pricing rules. Importers will again have freedom to choose between deductions on actual and default carbon prices, where the default price offers a larger or equivalent deduction.
The EU certainly possesses the world’s most developed carbon trading system in the EU ETS, but other countries do have – or have signalled intentions to develop – their own mechanisms to levy carbon costs on polluting production processes. After all, EU representatives have explicitly stated that CBAM is in part intended to incentivize the development and consolidation of global carbon pricing.
It follows, however, that these pricing mechanisms would need to meet a certain standard of integrity and transparency such to be deemed equivalent to domestic ETS burdens for the purposes of CBAM deductions.
As per the draft regulation, the ‘quality threshold’ for a carbon pricing scheme to qualify for deductions should be met “where that scheme takes the form of a tax, levy or fee or of emission allowances under a greenhouse gas emissions trading system that is binding in nature and imposes compliance obligations on all operators active in the relevant sectors covered by that mechanism without discrimination.”
Sufficiently developed carbon pricing schemes can collect on carbon costs in various ways; importantly including the surrender of international carbon credits, but only to cover up to 10% of an exporter’s reported emissions under said scheme, intended to ensure producers remain motivated to engage in direct decarbonisation of their own production processes back home.
Once relevant carbon payments have been properly mapped and assessed, the actual deduction entitlement will be calculated in reference to yearly average euro exchange rates – to be published by the Commission – and a yearly reference price for CBAM certificates.
Wider calculation and verification rules largely mirror those of the wider CBAM and ETS frameworks, reducing available deductions where producers paying carbon prices receive rebates or other relevant compensations, with the exception of carbon price revenues “reinvested in the decarbonisation of an operator’s installation.”
More rules, more certainty?
In many ways, this latest implementing act represents the final piece of the CBAM puzzle for importers, who now – in theory – are able to calculate their effective liability for 2026 imports once CBAM declarations and certificate surrenders come due in 2027.
Of course, the reality is more complicated, as many of the factors determining an importer’s annual CBAM bill are outside importers’ direct control. Verification procedures can only really start from 2027 (as they require a calendar year of import data post-2026 start), and emissions monitoring and reporting requirements under CBAM follow a strict methodology closer to EU Emissions Trading System (ETS) rules than established global standards such as those governing Environmental Production Declarations (EPDs).
Many of the EU’s importers now subject to CBAM are also relatively unfamiliar with carbon accounting and trading systems, especially as relates to national regulatory frameworks, and are unlikely to be practiced at assessing or operationalising on carbon price differentials between national or supra-national carbon markets.
Ultimately, this serves to frontload another CBAM obligation into early-2027 for importers, as any carbon price deductions will similarly require a range of verified data based on 2026 averages. There is something of a silver lining in that they should be able to estimate possible carbon price deductions on the basis of these averages before certificates become available for purchase in February 2027, as well as arrange combined verification of carbon price deductions and embedded emissions – but these factors do little to alleviate business financing and planning burdens in 2026, stemming from indeterminate costs risk.
Experts also suggest that – at least initially – carbon price deductions are likely to be minimal for the EU’s core steel exporting origins, such as recent research from TULIP Consulting on EU-India trade cooperation in the context of CBAM, which cites expectations that costs due to India’s Carbon Credit Trading Scheme (CCTS) could reach just under EUR13/t by 2029, from initial estimates of EUR8.5/t.
Naturally these estimates would vary when applied to CBAM’s new carbon price deduction methodology, but it is unlikely that any methodological adjustment could make even a dent on default value costs. For example, Indian hot-rolled coil carries a default value of 4.7t CO2e/t, which incurs a default cost of approximately EUR250/t (at a EUR75 CBAM certificate price).
That said, EU importers could benefit down the line where the Commission’s facilitation of deductions for third country carbon price revenues incentivises greater environmental policy cooperation and regulatory harmony between the EU and its trading partners. TULIP describes how CCTS data could be used to update India’s published country-specific default values (reducing worst-cast costs for importers) – a cooperation initiative also included in the annexes of January’s EU-India Free Trade Agreement.
Author: Benjamin Steven
