CBAM: The Council’s position on the Commission's proposal
The legislative process around the establishment of an EU Carbon Border Adjustment Mechanism (CBAM) is moving to the next stage.
After the European Commission released its initial proposal on a CBAM regulation, the European Parliament’s rapporteur published his draft report, which proposes amendments to the EU Commission’s draft. Our previous two briefings present the key facts of the EU Commission’s draft regulation and provide an overview on the EU Parliament’s current view on this. (For further background see also our article on what the EU’s 2030 decarbonisation plan means for the hydrogen and ammonia industries.)
In reaction to these proposals, the Council of the European Union has now released its compromise text, a version of which is available here. The text reflects the Council’s position for negotiations to agree on a final regulation text (the so-called trilogue discussions) between the Commission, the Parliament and the Council. This briefing is an update on the main aspects of the EU Council’s current view.
Scope for inclusions and exemptions for small imports
The EU Council proposes an additional inclusion of a few specific aluminium products (such as aluminous cement, plates, vats, casks, drums) in the scope of CBAM. Beyond that, the Council has not proposed a further broadening of CBAM’s initial scope, but has asked the EU Commission to present, before 1 January 2026, a report on the application of CBAM and whether it could be extended to indirect emissions, goods further down the value chain and extra commodities. On the other hand, the EU Council has proposed an important reduction in CBAM’s scope; an exemption for goods that are in principle in scope of the regulation, but that do not have an intrinsic value exceeding a total of €150 per consignment. Such a reduction of CBAM’s scope will likely affect many minor import transactions, thus leading to a focus on the relevant greenhouse gas relevant imports.
Stricter penalties for imports rendered by non-authorised persons
The EU Commission’s initial proposal already foresaw penalties for both authorised declarants (who fail to comply with the surrender of CBAM certificates) and for persons other than authorised declarants (who introduce goods into the customs territory of the Union without surrendering CBAM certificates). For the latter, the EU Council now proposes a broader penalty system.
- Not only the non-surrender of CBAM certificates as such, but more generally a non-compliance with the CBAM regulation shall be a triggering event for a penalty for persons other than authorised CBAM declarants.
- The applicable penalties for these other persons can now be three-to-five times the penalty foreseen for authorised CBAM declarants that do not surrender CBAM certificates properly, depending on the duration, gravity and scope of non-compliance. The EU Commission’s initial draft only intended that these persons face a penalty equal to the penalty for authorised CBAM declarants.
Nevertheless, the EU Council’s draft foresees that Member States’ national law be applicable for the enforcement of penalties in the CBAM regulation. The proposal for stricter penalties for non-compliant persons other than authorised CBAM declarants encourages the addressees of the regulation far better to effectively implement and recognise the upcoming CBAM rules than the initial proposal.
The deletion of the Member States’ option to introduce local administrative and criminal sanctions in addition to the CBAM penalty system also seems reasonable, as it brings legal security, especially for CBAM addressees acting in more than one Member State. Removing this option also helps avoid an uneven implementation of CBAM at the Member State level.
However, many expected an explicit statement that additional national penalties are not permitted, as a simple deletion of such option for the implementation of local penalties does not necessarily mean that the Member States will not try to implement additional local penalty systems.
Credits for carbon prices paid in country of origin: circumvention clause
The EU Council proposal also focusses on the crediting of non-EU carbon pricing. As already foreseen in the initial regulation draft, a declarant may claim in its CBAM declaration for a reduction in the number of CBAM certificates to be surrendered in order for the carbon price paid in the country of origin for the declared embedded emissions to be taken into account.
According to the EU Council’s proposal, however, such non-EU carbon prices may only be taken into account to the extent they have effectively been paid (ie any rebate or any other form of compensation available in the country of origin that would have resulted in a reduction of that carbon price shall reduce the credit). In this context, the EU Council’s proposal also foresees several specifications on the records to be kept by a declarant. Further details shall be regulated by the EU Commission in more detailed implementing acts.
To tackle possible circumventions of the CBAM rules, the EU Council proposes a more explicit definition of the term “circumvention”. The proposal for a definition contains two examples for circumvention:
- slight modification of goods concerned to make them fall under CN codes which are not listed in Annex I to the regulation, provided that the modification does not alter their essential characteristics; and
- an artificial split of shipments into separate consignments with intrinsic values below €150 each in order to avoid the obligations of the CBAM regulation.
These examples suggest there might be other circumvention practices covered by the definition.
In addition to the EU Commission’s initial draft (which already foresaw a notification system for Member States or any party affected or favoured by circumvention), the EU Council proposes that the EU Commission continuously monitor any significant change in the pattern of trade of goods and slightly modified products at Union level.
As with international tax law, CBAM administrations will have to deal with addressees’ efforts to mitigate the burden of purchasing and surrendering CBAM certificates. Against this background, it is important that the legislators give thoughts on essential aspects like credits for non-EU carbon pricings and circumvention practices at a very early stage.
Predicting the final nature of these changes is challenging, and we expect several amendments and specifications during the legislative process (not least as most problems associated with crediting and circumvention will only become visible once the CBAM system is fully established).
Main procedural aspects of the proposal
The EU Council proposes the establishment of a central registry of authorised CBAM declarants at the level of the EU Commission. We welcome this proposal, as the establishment of many national registries would bear the risk of an uneven implementation of the CBAM rules, accompanied by high administrative burdens especially for multinational addressees of the regulation.
The Member States’ local administrations will nevertheless remain crucial for the implementation of CBAM. According to the EU Council’s proposal, national administrations must, for example, issue allowances for being registered as an authorised CBAM declarant or verify the information provided in CBAM declarations.
However, in the EU Council’s view, the EU Commission should play a unifying role by issuing implementing acts on the registration procedure for authorised CBAM declarants, and by setting out specific risk factors and attention points for the national competent authorities in the context of verifying CBAM declarations. According to the proposal, the EU Commission will also have to conduct an estimation of CBAM obligations if an authorised CBAM declarant fails to submit a CBAM declaration.
The EU Council’s draft has another relevant structural change in the mechanics of CBAM administration: importers operating from outside the EU must file applications for the registration as authorised CBAM declarants through their indirect customs representative. This indirect customs representative will, according to the EU Council, also play a relevant role in the transitional period from 1 January 2023 until 31 December 2025. A fulfilment of reporting duties through such person will be mandatory for importers not resident in the EU.
Next steps on CBAM
The EU Council came to an agreement quicker than expected due to pressure from France, current holder of the EU Council’s Presidency. France had announced that reaching a general approach on CBAM was one of its utmost priorities. However, overall changes proposed in the agreement seem minimal in the sense that Member States have not really made many amendments to the EU Commission’s proposal and key political issues remain open and unresolved. Indeed, the EU Council has warned that trilogue discussions cannot start until the following issues, relating to other EU Fit for 55 files, have been resolved:
- the timeline for surrendering the CBAM certificates is conditional to the timeline for phasing out free allowances in the Emission Trading System (ETS) (see also Art. 31 of the draft regulation); and
- in order to limit carbon leakage related to exports, the EU Council has asked to identify appropriate solutions in line with WTO rules.
This suggests that the Council will want to see the adoption of an agreement on ETS before embarking on trilogues. The ETS is a considerably more controversial and the EU Parliament’s negotiations are proceeding at a much slower pace so negotiations between the Parliament, the Council and the Commission may not start until later in 2022.
The European Parliament’s timeline remains the same: the amendments to the rapporteur’s report have been discussed in the Parliament and are now subject to compromise discussions. The ENVI Committee is due to reach a final position on 11 May 2022 but this could be delayed further by heated debate between political groups. The report will then be voted in the plenary session of the European Parliament, where all members of the EU Parliament will vote on the proposal. This should still happen before summer.