The European Green Deal and climate neutrality are currently hot topics both in Europe and globally, and they will have an impact on environmental protection policies in Latvia, particularly affecting companies operating in the iron, steel, cement, fertiliser, aluminium and electricity production or import sectors.
Carbon Border Adjustment Mechanism
Europe has announced a commitment to reduce carbon emissions by 55% by 2030 compared to 1990 levels, aiming to become a climate-neutral continent by 2050. However, if strict policies to reduce carbon emissions are implemented only in Europe, the intended measures might not achieve significant results, as some entrepreneurs will want to relocate their carbon-intensive production to third countries where environmental and climate policies are less stringent. Alternatively, EU products could be replaced by imports of more carbon-intensive goods.
Climate change is a global problem that requires global solutions. To mitigate efforts to shift carbon emissions outside of Europe, the European Commission has proposed the introduction of a Carbon Border Adjustment Mechanism (CBAM) starting from 2023 – a system that, while respecting World Trade Organization rules and other international obligations, will ensure that EU importers purchase carbon certificates at a carbon price equivalent to what would have been paid had the goods been produced under EU carbon pricing rules. If a producer in a third country can prove that they have already paid a price for the carbon used in the production of the imported goods in that country, those costs will be deductible for the EU importer. The CBAM will help reduce the risk of carbon leakage, encouraging producers in third countries to make their production processes more environmentally friendly.
To ensure legal certainty and stability for businesses and other countries, the CBAM will be introduced gradually. Initially, it will apply only to certain goods at high risk of carbon leakage: iron and steel, cement, fertilisers, aluminium, as well as electricity production.
How will the CBAM work in practice?
The CBAM will be somewhat similar to the emissions trading system, as importers of goods at risk of carbon leakage will be required to purchase certificates. The price of the certificates will be calculated based on the weekly average auction price of allowances, expressed in euros per tonne of CO2 emitted. To purchase CBAM certificates, importers of goods will need to register, either themselves or through a representative, with the national authority responsible for administering the certificates. This authority will also be responsible for selling CBAM certificates to importers.
To import goods subject to the CBAM into the EU, importers will be required to declare the quantity of goods imported into the EU during the previous year and the amount of emissions generated during the production process of these goods by 31 May each year. At the same time, importers will have to surrender the CBAM certificates they previously purchased to the national authority responsible for administering the certificates.
Thus, within the EU emissions trading system, importers will pay the same carbon price as domestic producers, and the CBAM will ensure equal treatment of EU-produced goods and imports from other countries, while avoiding carbon leakage.