Under the agreement, the CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.

The CBAM is hoped to make sure that the price for embedded carbon emissions generated in the production of certain goods imported into the EU, ensuring that the carbon price of imports is equivalent to the carbon price of domestic production.

In a statement, the European Commission said, “Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.”

The Commission added that the measure, “should prevent the risk of carbon leakage and support the EU’s increased ambition on climate mitigation, while ensuring World Trade Organisation (WTO) compatibility.”

The agreement is set to be complemented by the revision of the EU Emission Trading System (ETS), with negotiations expected to take place this week, which are anticipated to align with the phase-out of free allowances under the CBAM, supporting the decarbonisation of EU industry.

H2 View understands once the permanent system is in force, importers will need to declare each year the quantity of goods imported into the EU the previous year and their embedded greenhouse gas (GHG) emissions.

With the CBAM set to being the first phase of its transitional entry on October 1, 2023, it is hoped the new pricing tool, once fully phased in will capture more than 50% of the emissions of the ETS covered sectors.

“I welcome the political agreement reached on the Commission’s proposal for a Carbon Border Adjustment Mechanism,” said Ursula von der Leyen, President of the European Commission. “This is a central part of our European Green Deal, preventing the risk of carbon leakage. It is a huge step forward, as we raise our climate ambitions.”

Calls for more

Despite welcoming the carbon pricing tool, Hydrogen Europe has said the CBAM, fails to consider some important aspects for the well-designed coverage of hydrogen.”

The association said that a “substantial share” of the targeted 10 million tonnes of renewable hydrogen imports into the EU by 2030 under the REPowerEU plan will be done through hydrogen carriers.

Read more: REPowerEU: €34-49bn needed for hydrogen infrastructure

“Regrettably, the CBAM will only cover one of those carriers (ammonia), but many others are excluded, such as methanol, and liquid organic hydrogen carriers (LOHC) – both of which should have been covered under Organic Chemicals as proposed by the EP,” Hydrogen Europe said in a statement. “This can distort import strategies and might have negative consequences for the direct import of hydrogen via pipelines.”

Hydrogen Europe has said that the European Commission should follow up on the agreement by providing more details regarding the impacts on imports of hydrogen and its carriers to the EU, on availability of free allowances for low-carbon hydrogen production, and on jobs in the hydrogen sector.

“The CBAM can be a key tool to meet Europe’s decarbonisation targets while preserving its industrial base,” said Daniel Fraile, Chief Policy Officer at Hydrogen Europe. “However, a good CBAM deal covering hydrogen can only be a good deal if it has followed an impact assessment and if it puts hydrogen and all hydrogen carriers on an equal footing in terms of carbon leakage protection.”

Fraile added that EU lawmakers should work with stakeholders to develop solutions to ensure conditions are met, and that CBAM’s scope should be expanded to cover downstream products, including electrolysers and fuel cells, “that use CBAM-covered goods as main components.”