EU ETS, CBAM and Social Climate Fund fully adopted

25/04/23

This article was last updated on 16 May 2023.

The Carbon Border Adjustment Mechanism (CBAM), the Revision of EU ETS including for aviation and maritime, the new ETS II for Road transport and buildings and the Social Climate Fund, have been adopted and published in the Official Journal of the EU. These are key proposals of the EU Fit for 55 package. With these proposals, the EU aims to reach a reduction of greenhouse gas emissions of at least 55% by 2030 compared to 1990 levels.

The CBAM stands out amongst these proposals as the EU border equivalent of EU ETS. It introduces an EU importation levy on the embedded carbon emissions of certain goods. Essentially, CBAM is aimed at preventing carbon leakage by companies that relocate their production outside the EU to avoid climate regulation costs. For the CBAM, a transitional period starts with first administrative obligations from 1 October 2023.

After formal adoption by the EU Parliament on 18 April 2023 and the Council of the EU on 25 April 2023, the EU laws were published on 16 May 2023.

Below are the most relevant aspects of the adopted proposals.

What does this mean for you?

Although the direct impact from these adopted proposals, in the form of administrative and financial obligations, will phase in and build up in the coming years, it is important to realise the significance of the impact on your supply chain and production costs. CO2 emission certificates are expected to become increasingly scarce and therefore expensive, which is something to anticipate. Also, administrative obligations will increase starting with administrative requirements for CBAM on 1 October 2023.

PwC has broad knowledge and experience identifying the carbon embedded in supply chains relating to your business. We can help you develop a step-by step approach to the challenges ahead enhancing new opportunities.

Carbon Border Adjustment Mechanism (CBAM)

The CBAM will be a levy on the importation of certain goods into the EU, in an attempt to better reflect the embedded carbon emissions resulting from the production of the goods. A transitional period starts with first administrative obligations from 1 October 2023.

Scope of CBAM

The CBAM will initially cover a number of products in specific carbon intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, some precursors and a limited number of downstream products.

Transitional phase and phase in

A transitional phase starts on 1 October 2023, imposing administrative obligations. Importers of the products in scope have to report their embedded GHG emissions of CO2 and, where relevant, nitrous oxide and perfluorocarbons.

After this transitional phase, the CBAM will be phased in gradually, in parallel to the phasing out of the free allowances under EU ETS, over a nine-year period between 2026 and 2034. In line with the phase in, EU importers of these products will then need to purchase CBAM certificates for their import. The price of the CBAM certificates corresponds to the EU ETS carbon price that would have been paid if the goods were produced within the EU.

This way, CBAM is a policy tool that ensures a level playing field for EU carbon-intensive goods within the EU Single Market.

EU ETS Reform general

EU ETS is a carbon market, based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector. The Parliament and the Council have agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by the EU ETS to 62%. This has two main elements.

Firstly, a faster reduction of the cap: 4.3% reduction annually in 2024 to 2027, 4.4% reduction annually in 2028 to 2030, instead of the current 2.2%.
Secondly, the total quantity of allowances should be reduced in 2024 and 2026 to bring it more in line with actual emissions.

Phase out of free allowances

Free allowances will be gradually phased out for certain sectors, aligning with the introduction of the CBAM. During a nine-year period between 2026 and 2034, the free allowances will be phased-out at a slower rate at the beginning and an accelerated rate at the end.

In more detail, the free allowances to industries in the ETS will be phased out as follows.

2026	2027	2028	2029	2030	2031	2032	2033	2034
2.5%	5%	10%	22.5%	48.5%	61%	73.5%	86%	100%

So as of 2034 - with a few exceptions - the free allowances will be completely abolished. Before the end of the assessment period, the Commission shall assess the risk of carbon leakage for goods produced in the EU intended for export to non-EU countries and, if needed, present a WTO-compliant legislative proposal to address this risk.

EU ETS for Maritime

Maritime shipping emissions will be included in the scope of EU ETS. The EU Parliament and the Council agreed on a gradual introduction of obligations for shipping companies to surrender emission allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026.

Large vessels, above 5,000 gross tonnage will be included in the scope of EU ETS maritime from the start. Before 2027, the Commission will examine the feasibility of including (offshore) vessels between 5,000 and 400 gross tonnage in EU ETS. It is agreed to include non-CO2 emissions (methane and nitrous oxide) in EU ETS from 2026 onwards. In addition, the agreement strengthens measures to combat the risk of evasion.

A part of the proceeds of EU ETS will be made available to various sectors, including maritime, through the Innovation Fund.

EU ETS for Aviation

The scope of EU ETS for the aviation sector is limited to intra-European, meaning that it applies to emissions from flights departing from within the EU to a destination within the EU or to the United Kingdom or Switzerland. Extra-European flights, to and from third countries, fall under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). From 2027, the EU ETS scope for aviation will be extended to flights to third countries that do not apply CORSIA.

Free emissions allowances for the aviation sector will be gradually phased out starting in 2026. Also, the current exception from the EU ETS scope of EU ETS for flights from within the EU to third countries could be abolished in case of a negative evaluation of CORSIA’s progress by 1 July 2026.

By 1 January 2028, the Commission will also propose mitigating measures for non CO2 aviation effects where appropriate.

EU ETS for Buildings and Road Transport and fuels for additional sectors

A new, separate EU ETS is created for the buildings and road transport sector and fuels for additional sectors. Under this mechanism, fossil fuels for road transport and heating are assigned a carbon price. Distributors that supply fuels to the buildings, road transport and certain other sectors selling fossil fuels need to buy allowances (at the carbon price) for the emissions caused by running their business.

Free emission rights are not envisaged, as the prices are to be passed on to consumers by fuel traders in order to achieve the necessary climate protection incentives. The system will start in 2025 whereby the issuance of allowances and compliance obligations will become applicable as from 2027.

Part of the revenues from the auctioning of allowances will be used to support vulnerable households and micro-enterprises through the Social Climate Fund.

Social Climate Fund

The Social Climate Fund aims to support vulnerable households, micro-enterprises and transport users in coping with the price impacts of an ETS for the buildings and road transport and fuels for additional sectors. The fund will help tackle energy poverty and improve access to zero- and low-emission mobility and transport in the EU. The fund will be established over the period 2026-2032, with eligibility of expenditures from 1 January 2026.

Next steps

The approved proposals consist of both directives and regulations. Directives have to be implemented in national law to effectively enter into force, whereas regulations have direct effect. More backgrounds on this can be found on our EU Fit for 55 landing page.