How will free allocation be accounted for in the calculation of the CBAM obligation to be paid?
Rules will be developed by the European Commission in that regard following the empowerment of Article 31 (2) of the CBAM Regulation
The CBAM obligation to be paid by importers will be reduced by the corresponding free allocation that an EU producer would receive for the production of the same goods. This will ensure that products produced in the EU and in third countries are treated equally.
This adjustment for free allocation will include a definition of CBAM benchmarks, which in turn will be based on a combination of the EU ETS benchmarks. A combination is needed because there are only a limited number of ETS product benchmarks available and because these are not defined per CN codes.
The gradual phase-out of ETS free allowances in CBAM sectors from 2026 to 2034 will be mirrored by a corresponding increase in the CBAM obligation. This is because the CBAM adjustment for free allocation will gradually decrease and thereby the CBAM obligation will increase.
The emissions subject to CBAM will be calculated as follows:
emissions subject to CBAM = embedded emissions – CBAM benchmark × CBAM factor
For example, if the embedded emissions of a good amount to 1.2 t CO2 eq/t good and the corresponding CBAM benchmark is 1 t CO2 eq/t good, then the emissions subject to CBAM in 2026 (with a CBAM factor of 97.5%) would amount to: 1.2 – 1 × 0.975 = 0.225 t CO2 eq/t good, equivalent to around 19% of the embedded emissions. In 2030 (CBAM factor 51.5%), the emissions subject to CBAM would amount to 0.685 t CO2 eq/t good (i.e. around 57% of the embedded emissions) and in 2034 (CBAM factor 0%) to
1.2 t CO2 eq/t (i.e. 100% of the embedded emissions). From 2034 onwards, there will be no adjustment for free allocation and the full CBAM liability would apply for imports of this good.
It follows from this calculation that no CBAM obligation will apply in a given year if the embedded emissions of a good are lower than the CBAM benchmark multiplied with the CBAM factor. In the given example for 2026, no CBAM obligation would thus be due if the embedded emissions were equal to or lower than 0.975 t CO2 eq/t.
As there is generally no free allocation for electricity generation in the EU ETS, there will in principle no free allocation adjustments to the CBAM liability for electricity imports. Thus, the entire embedded emissions in the electricity production will require a corresponding purchase of CBAM certificates from 2026 onwards.
Source: EC’s Questions and Answers on CBAM
CBAM Regulation
CBAM Regulation