On December 13, 2022, negotiators of the European Council and the European Parliament reached a provisional agreement on the Carbon Border Adjustment Mechanism (“CBAM”), a carbon tax impacting certain goods (or processed products from those goods) imported into the customs territory of the EU from outside it. On April 18, 2023, the Parliament formally approved the deal in a 413–167 vote (with 57 abstentions), and the Council gave its formal approval one week later. The legislation will shortly be published in the EU Official Journal and enter into force.
Part of the EU’s “Fit For 55” package, CBAM’s aim is to complement the world’s largest emissions trading system, the EU Emissions Trading System (“EU ETS”), by preventing the risk of carbon leakage to jurisdictions with a lower or non-existent carbon price, and to support the goals of the Paris Agreement. The CBAM intends to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU, and to encourage cleaner industrial production in non-EU countries. Its staged application aligns with the intended phase-out of the allocation of free allowances under the EU ETS in support of the decarbonization of EU industry.
In this Alert, we provide an overview of the CBAM, which has significant implications for private fund managers with portfolio companies in the regulated sectors that do business in the EU, as well as for global companies with a presence in the regulated sectors.
Overview of Carbon Border Adjustment Mechanism
As noted above, CBAM is part of the EU’s Fit for 55 package, which aims to provide a comprehensive framework for reaching the EU’s climate objectives — including a 55% greenhouse gas (“GHG”) emissions reduction from 1990 levels by 20301 — by revising and updating existing EU legislation with new initiatives. The package covers reforms across several policy areas such as energy, environment, transport and financial affairs.
CBAM addresses the risk of carbon leakage, which occurs when businesses in carbon-intensive sectors transfer production to countries with a lower or non-existent carbon price, or consumers substitute higher-carbon imports. To date, the EU ETS (which