How does CBAM interact with the EU Emissions Trading System (ETS)?
The EU Emissions Trading System (ETS) is the world's first international emissions trading scheme and the EU's flagship policy to combat climate change. It sets a cap on the amount of greenhouse gas emissions that can be released from power production and large industrial installations. Allowances must be bought on the ETS trading market, though a certain number of free allowances is distributed to industry to prevent carbon leakage. In order to step up the incentive to decarbonise, the CBAM will progressively be introduced as free allowances are reduced. Under the EU ETS, the number of free allowances declines over time for all sectors. For CBAM sectors, the decline accelerates as from 2026, so that the ETS can have maximum impact in fulfilling the EU’s ambitious climate goals. At the same time, the CBAM financial adjustment is phased in according to a gradual schedule.
The CBAM will be based on a system of certificates corresponding to embedded emissions in CBAM products imported into the EU. The CBAM departs from the ETS in some limited areas where it was needed, as it is not a ‘cap and trade' system. For example, and unlike the EU ETS, an unlimited number of certificates can be purchased. Nevertheless, the price of CBAM certificates will mirror the ETS allowance price.
Once the full CBAM regime becomes operational in 2026, the system will adjust to reflect the revised EU ETS, in particular when it comes to the reduction of available free allowances in the sectors covered by the CBAM. This means that the CBAM will only begin to apply to the products covered, and in direct proportion to the reduction of free allowances allocated under the ETS for those sectors. Put simply, until free allowances in CBAM sectors are completely phased out in 2034, the CBAM will apply only to the proportion of emissions that does not benefit from free allowances under the EU ETS, thus ensuring that importers are treated in an even-handed way compared to EU producers.
Source: EC’s Questions and Answers on CBAM