On March 4, 2020, the European Commission (“Commission”) started the consultation process for a Carbon Border Adjustment Mechanism ("CBAM") by publishing an Inception Impact Assessment ("IIA"). A CBAM would be just one element of the European Green Deal which was announced in December 2019 and which is part of the European Union's ("EU") efforts to achieve carbon neutrality by 2050.

The European Green Deal already confirmed that in the event that "differences in levels of ambition worldwide persist, as the EU increases its climate ambition, the Commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage." Therefore, a CBAM would be a tool to achieve increased climate ambition, in particular if the commitments of other Parties to the Paris Agreement made during COP26 in Glasgow in November 2020 were to fall short of the level of ambition sought by the EU.

The IIA clarifies that a CBAM seeks to ensure that the price of imported products more accurately reflects their carbon content and that it should be designed in a manner that is consistent with the EU's obligations under the World Trade Organization ("WTO") and other international agreements. In addition, the IIA indicates that the Commission will assess the complementarity of a potential CBAM with internal carbon pricing mechanisms, and in particular the EU Emissions Trading Scheme ("ETS"), with a view to ensuring that a CBAM would be "commensurate with the internal EU carbon price." There are, therefore, parallels between this plan and the allocation of free allowances under the ETS.

At this stage, the EU foresees that a CBAM could take one of three forms:

  • A carbon tax on selected products—applicable on both imported and domestically produced products;
  • A new carbon customs duty or tax on imports; or
  • The extension of the EU ETS to imports.

In respect of the approach to determining the carbon content and carbon pricing of imports, the IIA provides that EU-wide benchmarks developed under the ETS will be used. However, the Commission will also look at alternative approaches, e.g., defining the carbon content of products, taking into account their interaction with existing and future climate policies. Historically, benchmarking under the ETS has been controversial and has given rise to legal action.

The IIA also clarifies that a CBAM may only be applicable to certain sectors. The Commission will define "[a] scoping in terms of sectors concerned" so as "to ensure that the measure applies where the risk of carbon leakage is the highest."

The initial feedback period under the consultation lasts until April 1, 2020, during which stakeholders can provide early input on a CBAM. This will be followed by an official questionnaire-based public consultation, which will allow all stakeholders to give their views on all the aspects of a potential CBAM. The public consultation will last for a minimum of 12 weeks. The consultation is open to all stakeholders with an interest in the proposal, regardless of whether they are established in the EU. The consultation provides a useful opportunity for clients in key sectors to provide their initial views on the proposals.