Europe tightens the net on companies polluting outside its borders

The European Union wants to strengthen the Carbon Border Adjustment Mechanism (Cbam), the system that applies a carbon cost to imports from third countries of certain carbon-intensive products. 

These imports must bear a cost linked to their emissions, so as to take into account the carbon price already paid by European companies through the EU Emissions Trading System. The Cbam is designed to ensure that a product imported from a non-EU country cannot enjoy an advantage over EU companies simply because the cost of emissions in the country where it was produced is lower or non-existent.

With 464 votes in favour, 50 against and 159 abstentions, the European Parliament backed the Commission's proposal to extend the scope of the mechanism beyond basic commodities such as steel, aluminium, cement and fertilisers to a broad range of downstream products, including finished steel and aluminium products such as fasteners, metal wires, springs and household articles, extending it further than proposed by the executive. 

Gaps filled

"We have closed important loopholes, strengthened the enforcement of anti-circumvention rules and extended the scope of the mechanism in the sectors where it matters most," said the rapporteur of the text, Dutch Socialist MEP Mohammed Chahim.

"The aim of Cbam is to ensure a level playing field: companies outside Europe should decarbonise their products or pay for their carbon content, just as European companies already do. But this only works if the system is watertight," Chahim added.

The position adopted in plenary is the Parliament's position, which will now be subject to trilogue negotiations with the EU Council.

From raw materials to finished products

The most visible change concerns the scope of the Cbam. The mechanism was initially designed for goods most exposed to the risk of carbon leakage, with the aim of preventing carbon from being 'made to disappear' at the border through the processing of a product. If the Cbam covers a raw material but not a finished product incorporating it, an importer may have an incentive to buy the more processed product directly from abroad. 

Examples include fasteners, metal wires, springs, certain structures, pipes, and aluminium products and components. The extension voted by Parliament covers 180 additional downstream products with high steel and aluminium content, further expanding the scope beyond the Commission's proposal. 

"We are expanding product coverage to strengthen the level playing field and introducing tougher anti-circumvention rules, particularly to counter resource shifting from China," said the other rapporteur, French liberal MEP Pascal Canfin.

Closing the loophole

The reform aims to tackle strategies specifically designed to reduce or circumvent the carbon cost. Among the practices identified is what the text refers to as "resource shifting".

In concrete terms, the problem may arise when a company producing the same good at several plants decides to send only the production from its least polluting plant to the EU, while selling its more emissions-intensive production on other markets. In this way, without actually reducing its overall emissions, the company could artificially lower the carbon cost associated with goods imported into the EU.

For this reason, in cases considered to be at higher risk, importers will not be able simply to report the emissions data provided by the producer. They will have to demonstrate that the data accurately reflect the production process and are not the result of a reorganisation of production designed to circumvent the Cbam. If they fail to provide the required evidence, a standard value established under EU rules will be used to calculate the emissions of the goods, which could therefore result in a higher Cbam obligation. The Commission will also have to review at least once a year whether the situations considered to be at risk still justify this treatment.

Online shopping also enters the Cbam

The extension of the Cbam to finished products also covers online sales from non-EU countries. Parliament wants to prevent a European company from having to pay the carbon cost on an imported product while the same product, sold directly online by a non-EU company, could escape the same obligations. For this reason, platforms managing these sales, or their representatives, will have to assume responsibility for the imports and the related Cbam obligations.

The reform also seeks to prevent companies from artificially splitting their imports into numerous small shipments in order to remain below the threshold that triggers Cbam obligations. If the authorities establish that the splitting was deliberately intended to circumvent the mechanism, the company may be considered subject to the Cbam for all imports made since the beginning of the year. It would therefore have to pay Cbam certificates even for goods that have already been imported.

The scrap metal issue

Parliament is also changing the way scrap used to produce steel and aluminium is taken into account. The aim is to prevent declaring a material as post-consumer scrap from being used to report lower emissions than those actually generated.

Importers of these products will therefore have to indicate how much of the product derives from scrap from industrial waste and how much from material recovered after use, that is, post-consumer scrap. In the case of aluminium, where post-consumer scrap is used, checks and documentation will also be required to confirm its actual origin and nature.

A fund to support industry

Parliament is accompanying the tightening of the Cbam with financial support for European companies. The Temporary Decarbonisation Fund is intended to support companies on export markets, where the Cbam does not directly protect European producers because the issue is not imports into the EU, but competition from foreign producers that do not face an equivalent carbon cost.

The Parliament's position calls for support to be brought forward to the 2027-2029 period, rather than starting in 2028 as proposed by the Commission, and for the scheme to be extended to fertiliser producers and operators facing higher carbon costs. The products considered strategic include urea, ammonium nitrate and ammonium sulphate. 

Parliament also wants all downstream operators using goods subject to the Cbam to be eligible for the Fund. Any remaining revenues should be allocated to the EU's international commitments on climate finance under the Paris Agreement, rather than being returned to the Member States.