EU Emissions Trading System and CBAM

Last updated: 17/04/2024

The EU "Fit for 55 in 2030 package" (reducing greenhouse gas (GHG) emissions by at least 55% by 2030) approved by the EP and the Council in April 2023, includes the reform of the Emissions Trading System (ETS), with GHG emissions in the ETS sectors to be cut by 62% by 2030 compared to 2005-levels. The reform also phases out free allowances to companies from 2026 until 2034 and creates a separate new ETS II for fuel for road transport and buildings that will put a price on GHG emissions from these sectors in 2027 (or 2028 if energy prices are exceptionally high).
The reform also included GHG emissions from the maritime sector and a revision of the ETS for aviation. This will phase out the free allowances to the aviation sector by 2026 and promote the use of sustainable aviation fuels.
An EU Carbon Border Adjustment Mechanism (CBAM) sets a carbon price on imports of selected products (initially cement, iron and steel, aluminium, fertilisers, electricity and hydrogen) to prevent “carbon leakage” and to encourage non-EU countries to adopt similar net zero plans. Under the full scope CBAM regime, EU importers would be required to buy CBAM certificates from their national authorities (carbon prices already paid on production would be deducted from the certificate price, which is linked to the EU ETS).
The EC proposed to allocate to the EU budget 75% of CBAM revenues, increasing its strategic importance for the EU.
The CBAM is currently in the transitional application phase (until 31 December 2025) during which only reporting is required from importers (but no purchase of CBAM certificates).
The UK government is currently in discussion with the EU to limit the impact of an EU CBAM on trade between the EU and the UK for businesses, but documentation upon import to the EU may be required. In addition, the UK government has confirmed its intention to implement a UK CBAM in 2027 (design and delivery subject to consultation in 2024) (see 'Carbon pricing – international and UK approach’).
Timing: following the transitional application phase, the CBAM is being phased in from 2026 until 2034 at the same speed as the free allowances in the EU ETS are being phased out.