In a Nutshell

The EU Carbon Border Adjustment Mechanism (CBAM) is the EU’s landmark tool to prevent carbon leakage and support the EU’s increased climate ambitions. It works by putting a price on carbon emitted during the production of carbon-intensive goods entering the EU to incentivise cleaner industrial production in non-EU countries.  

Carbon leakage refers to the process of shifted production and/or emissions to other jurisdictions with less stringent emission constraints. It is one of the key obstacles for the EU to reach its climate commitments. The CBAM was designed to specifically address this risk. Carbon leakage can occur when a domestic carbon price negatively impacts the competitiveness of an entity operating in this domestic context. This increased cost might result in the entity shifting its production to another country with a lower carbon price to reduce production costs. For example, a steel producer might consider relocating its production outside of the EU to avoid paying for the carbon it emits. Another possible instance of carbon leakage occurs when non-domestic producers that are not subject to the price of carbon enjoy significant competitive advantages compared to domestic producers, resulting in a shift of production abroad.  

The sectors that will first be covered by the CBAM are energy-intensive industries, namely cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. When fully phased in, the CBAM will capture approximately 50% of the emissions covered by the EU Emission Trading System (ETS). 

The CBAM is based on the purchase of certificates by importers, which represent the embedded emissions in the imported goods. The price of the certificates will be calculated based on the weekly average auction price of EU-ETS allowances, equivalent to Euro per tonne of CO2 emitted.  

The CBAM will in principle apply to the imports of goods from all non-EU countries. However, countries participating in the EU ETS and Switzerland are excluded from the mechanism.  

Even though carbon removal has not been taken into account by the CBAM yet, the system provides opportunities to create incentives for CDR. There could be several ways to include CDR in the context of CBAM, including using CDR to directly reduce embedded emissions or to compensate for embedded emissions.  

What's on the Horizon?

Transitional phase 1 October 2023 to end of 2025: Under the Commission’s proposal, importers will have to report emissions embedded in their goods subject to CBAM without paying a financial adjustment in a transitional phase, providing stakeholders with some time to prepare for the final system to be put in place. 

Implementing acts are expected to be drafted and released throughout the transitional phase until 2026, though no clear timeline has yet been established. These include implementing acts on the calculation of default values for embedded indirect emissions and authorised declarant conditions and registries. A delegated act on certificates sale and repurchase is to be expected as well. Clarifications on the methodology for counting embedded carbon emissions, with separate methodologies for different sectors and goods, are also to be expected.   

An ongoing public consultation is taking place in the United Kingdom on whether it should introduce an equivalent system to the EU CBAM or not.  

Deep Dive

While the CBAM does not include CDR explicitly yet, there are a strong rationale for including it and several different ways it could be included.  

 The CBAM is intended to mirror the conditions that European Economic Zone actors experience when they emit carbon and fall subject to the EU Emissions Trading System (ETS). Assuming the EU-ETS includes permanent CDR within its scope to enable participants to reduce net emissions in 2030 at the earliest, a case can be made to integrate removals in the CBAM to make the two mechanisms work under the same rules. This would require clear rules on MRV mechanisms, with removals limited to hard-to-abate sectors. The CBAM could integrate CDR within its scope first, as it gradually phases in starting 2026.   

CDR could be included either directly or indirectly within the CBAM: 

  1. By authorising importers to buy durable removals to compensate a share of the embedded emissions and reduce their CBAM obligations. A clear mention of this measure could be made in Article 7. This addition could be done in accordance with the forthcoming CRCF by clearly specifying that only permanent removals are allowed. 
  2. By recognising CDR as a way to reduce a product’s overall embedded emissions, therefore reducing the product’s net-direct emissions. For example, a steel-making factory in a non-European country could buy durable CDR credits in its country of operations to reduce the product’s emissions. 

The revenues generated by the CBAM will go to the general EU budget. Since the CBAM covers many hard-to-abate sectors that will likely continue generating GHG emissions in the long term, it could be argued that some of the revenues generated by the CBAM could be used to incentivise/support CDR development/deployment. A share of the revenues could be used to finance the Innovation Fund 

Including CDR within the CBAM does come with some risks, among them the risk of greenwashing and disincentivising decarbonisation along value chains. While the CBAM itself might not contain the tools needed to tackle these two risks, other EU legislations could help address these risks. Greenwashing will likely be prevented by the Green Claims Directive, whilst the EU-ETS incentivises European companies to reduce their emissions.  

Whether CDR could be used to circumvent the CBAM or not should be clearly defined, and if yes, clear eligibility criteria should be created and agreed upon. Effectively, only high-quality removals should qualify, and priority should be given to reducing embedded emissions in the first place. EU policymakers still need to discuss and agree on the methodologies related to embedded emissions accounting, which could provide some opportunities to promote a stringent and robust approach to CDR under the CBAM. For example, indirect emissions could be reduced or even negated if BECCS is allowed in the methodology. 

CBAM in perspective 

The CBAM is not only considered an essential tool to achieve the EU’s climate objectives but also serves to ensure the EU’s industrial competitiveness with the rest of the world. However, while it puts European production on a level-playing field with imported products, European exports are currently still at a disadvantage. How this issue is tackled remains to be seen, as carbon leakage could still occur if a company shifts its share of European production going to the rest of the world outside of the EU.  

Other geographies are also engaging with similar ideas. The United Kingdom is currently going through a public consultation as to whether it should introduce a CBAM. Interestingly, one of the questions asked pertains to whether carbon credits should be used to offset emissions. The United States is currently reviewing the “Clean Competition Act”, which would create a CBAM for the USA. California has already put in place a system similar to the CBAM regarding electricity imports in some situations, and Canada is considering adopting a border carbon adjustment mechanism. 

Timeline

15 July 2021
10 May 2023
16 May 2023
17 August 2023
1 October 2023
31 January 2024
2025-2026
1 January 2026
2035
15 July 2021

Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism adopted by the European Commission. 

10 May 2023

Adoption by the EU Parliament and the Council. 

16 May 2023

Publication in the Official Journal of the EU.  

17 August 2023

The EU Commission adopted detailed reporting rules for the CBAM’s transitional phase.

1 October 2023

CBAM entered into force in its transitional phase. Importers only need to report until 2026, after which they will be required to pay financial adjustments.

31 January 2024

First reporting period for traders ends. 

2025-2026

Report reviewing how the CBAM is working and whether to extend its scope to more products and services to be published. 

1 January 2026

The permanent CBAM system will gradually enter into force while the free ETS allowances for CBAM sectors will be gradually phased out.

2035

All free ETS allowances will be phased out, thus CBAM will apply to all emissions in the sectors covered. 

Status

Unofficial Title

CBAM

Year

2023

Official Document

Last Updated

24/07/2023

In a Nutshell

The Directive for the Substantiation of Explicit Environmental Claims (Green Claims Directive) is a legislative proposal that aims to address and reduce greenwashing in consumer-facing commercial practices. It establishes minimum requirements on the substantiation and communication of voluntary environmental claims and labels that are not otherwise banned under the Directive on Empowering Consumers for the Green Transition.

To make green claims (including climate-related claims) about the environmental footprint of their products, services, and operations, companies will need to comprehensively demonstrate environmental impact and performance by submitting recognised scientific evidence and the latest technical knowledge. The Directive establishes specific requirements for distinguishing claims on environmental performance from common practice, legal obligations, and from other traders or products.

Environmental claims and labelling schemes will be verified by independent accredited bodies before being put on the market. Member states will nominate a competent national authority to supervise this process, monitor and verify the claims and substantiations on a regular basis. This monitoring will help the Commission evaluate where more specific requirements are needed and implement delegated acts accordingly.

Climate-related claims such as net zero or carbon neutrality claims based on carbon credits use, including carbon removal, fall under the remit of this Directive. To substantiate such claims companies must report offsetting and emissions data separately, specify whether offsetting relates to emissions reductions or carbon removals, and explain accurately the accounting methodology applied. Once approved and when communicating to consumers, climate-related claims must be accompanied by additional information detailing the extent of reliance on offsetting and whether it is based on emissions reductions or removals.

What's on the Horizon?

The Green Claims proposal by the European Commission is currently being discussed within the European Parliament and the Council, with the aim to come to an agreement on their positions as part of the ordinary legislative procedure, before entering interinstitutional negotiations.

2023-2024: The European Parliament and the Council will develop their positions separately.

Directive on Empowering Consumers for the Green Transition (ECGT):
  • The Council adopted its negotiating mandate regarding the ECGT Directive on 3 May. The mandate outlines the Council’s position on this directive which would lay the foundation for the Green Claims Directive.
  • The European Parliament on adopted its position on 11 May 2023, setting stricter conditions than the Commission proposal.
  • On 19 September 2023, the Council and the Parliament reached a provisional agreement on the ECGT Directive, banning carbon neutrality claims for products and services based on carbon offsetting, and setting stricter requirements for organisations to make claims based on future environmental performance. Complementing the Directive on Empowering Consumers, the Green Claims Directive will provide further guidance on the conditions to make substantiated environmental claims.
  • On 17 January 2024, the European Parliament adopted the provisional agreement on the ECGT Directive. After the Council adopts the final text, the directive will be published in the Official Journal of the EU, and member states will have 24 months to transpose it into national law.

Green Claims Directive (GCD):

  • The ENVI and IMCO Committee (joint committees responsible) adopted their report on 14 February 2024, which was adopted by the Parliament plenary on 12 March 2024.
  • The Council aims to adopt this file’s general approach on 17 June 2024.
  • 2024- 2025: Following trilogues between EU institutions, the Directive is expected to be formally adopted and transposed by member states.

Deep Dive

Policy Landscape

The Green Claims Directive complements the Empowering Consumers Directive published by the European Commission on 30 March 2022 within the EU. Together, they aim to improve the circularity of the EU’s economy and achieve climate neutrality. They set requirements to substantiate environmental claims made to consumers and other commercial practices.

Apart from the French ministerial decree n°2022-538, the Green Claims Directive is a first of its kind in the specificity with which it regulates environmental claims and addresses climate-neutrality claims. The French decree regulates advertising claims based on emission compensation projects. It has different requirements surrounding emissions reporting, compensation data, and net zero plans.

Aim

The Green Claims Directive proposal addresses the issue of greenwashing, increasingly prevalent in recent years. It seeks to standardise environmental claims and labels to improve transparency and credibility for consumers. The proposal aims to use delegated and implementing acts in the future to address substantiation methodologies for specific product groups and evolving commercial practices.

The preamble of the proposal states that climate-related claims are prone to being unclear and misleading, as they are often based on offsetting greenhouse gas (GHG) emissions through carbon credits of low environmental integrity and credibility, generated outside the company’s value chain and calculated based on methodologies that vary widely in transparency, accuracy, and consistency. Offsetting can also deter traders from reducing emissions in their own operations and value chains.

However, credible net zero claims have the potential to incentivise and drive the development of safe, just and sustainable carbon removals to transition towards real climate neutrality. Claims based on offsetting must be regulated through a robust and science-based system to prevent greenwashing.

Room for improvement

Unfortunately, the Green Claims Directive as it currently stands does not establish the necessary measures to do so:

  • The Directive does not align with scientific consensus as it allows offsetting through emissions reductions and avoidance to substantiate carbon neutrality claims. The IPCC’s definition of net zero is clear: balancing emissions with physical removals. Accordingly, offsetting projects that avoid emissions, but do not physically remove and store carbon, must be barred from use in substantiating claims about net climate impacts.
  • The proposal rightly requires companies to report GHG emissions separately from offsetting data, to disclose the share of their total emissions that are addressed through offsetting and whether these come from emission reductions or removals. This isn’t enough to monitor whether the claimed climate impacts are real. There is a need for more extensive disclosure on the types of carbon credits companies are purchasing (avoidance, reduction, removals), which emissions they are claiming compensation for, and the methodologies used to ensure integrity and correct accounting.
  • The proposal allows all types of offsetting without any clear criteria for which emissions they can compensate for, nor which climate claims they can substantiate. However, not all carbon storage is equal in terms of capacity, duration or reversal risk. This means that long-lived fossil fuel emissions otherwise impossible to abate can only be balanced by removals with high-durability storage in the geosphere where the carbon came from. Lower-durability removal and storage of carbon into the biosphere must be accelerated for its own sake, to halt and reverse the loss of ecosystems and natural carbon stocks but cannot be eligible to compensate for fossil fuel emissions. Failing to enshrine this non-fungibility principle in EU law would allow companies to continue offsetting their long-lived emissions through shorter-term carbon storage with higher risks of reversal.
  • Although the Directive encourages companies to use offsetting only for residual emissions, it provides no robust definition for what constitutes these residual or ‘hard-to-abate’ emissions. Without a sector-specific and measurable definition, companies can weaken emissions cutting efforts by manipulating the boundary between emissions that must be reduced’ and ‘emissions that physical removals can offset’. The EU will need to establish a transparent process for classifying emissions as difficult-to-decarbonise.
  • The proposal excludes from its scope environmental claims and labels substantiated by rules in the Carbon Removal Certification Framework (CRCF). However, the proposal for the CRCF has no rules for claim substantiation. Instead, the Green Claims Directive could establish guardrails for legitimate net zero claims, which could be substantiated through the purchase of high-quality carbon removal credits certified under the CRCF.

Timeline

11 March 2020
20 July 2020
25 November 2020
30 March 2022
22 March 2023
11 May 2023
6 June 2023
19 September 2023
17 January 2024
14 February 2024
12 March 2024
17 June 2024 (TBC)
11 March 2020

The EU Circular Economy Action Plan sets out the plan to support the EU’s transition to a circular economy, including by protecting consumers

20 July 2020

Impact assessment and public consultation on substantiating green claims

25 November 2020
30 March 2022
22 March 2023

European Commission publishes the proposal for Green Claims Directive (GCD)

11 May 2023

European Parliament adopts its position on the ECGT Directive

6 June 2023

Deadline to provide feedback to the Commission on the GCD legislative proposal

19 September 2023

The Council and the Parliament reached a provisional agreement on the ECGT Directive

17 January 2024

The EU Parliament adopted the ECGT Directive

14 February 2024

Joint report of the lead ENVI and IMCO Committees on the GCD adopted

12 March 2024

European Parliament plenary adopted the GCD joint report

17 June 2024 (TBC)

Council to adopt its general approach on GCD

Unofficial Title

Green Claims

Year

2023

Official Document

Last Updated

24/04/2023