One Step Closer To Carbon Border Adjustment Mechanism

With regard to the European Union (“EU”) practices on Climate Change which we have mentioned in our previous articles, last Wednesday, July 22, European Parliament adopted three key draft laws with the intention of making the Green Deal and the carbon net-zero target by 2050 more effective: (i) The new Emissions Trading System (“EU ETS”) (ii) the Carbon Border Tax (“Carbon Border Adjustment Mechanism–CBAM”) and (iii) the Social Climate Fund. This legislation has been announced by the European Commission last July as a part of a legislative package that would reduce carbon emissions by 55% until 2030 (“Fit For 55”). The Parliament will start negotiations with the EU governments on the final form and implementation of these draft laws.

Cbam And The New Eu Ets System

With the adoption of CBAM, an important step has been taken toward its implementation. The decision has been taken three years earlier than the proposed timeline by the European Commission. CBAM, which is meant to address the problem of carbon leakage and is expected to be implemented by the EU in 2026, regulates the carbon border tax to be applied to imports to EU countries from countries with weaker climate policies and do not have regimes similar to EU ETS.

The very first carbon tax will be applied with a transitional period from January 2023 to December 2026.

The scope of CBAM, which is adopted with the approval of a majority of the members of the Parliament calling for a broader scope and faster implementation, has been extended to cover organic chemicals, plastics, hydrogen and ammonia in addition to indirect emissions (e.g. emissions from the energy used in the production of these products) refineries, iron, steel, cement, and fertilizer which had been initially proposed by the Commission.

At the same time, one centralized CBAM authority will be established and the European Union will provide financial support, an amount equal to the revenues to be generated through CBAM, to least developed countries in an effort to reduce their carbon emissions.

The new EU ETS, where emission permits have been traded since 2005, has been restructured in a way to cover the following issues;

• Emission permits/free allowances will be phased out starting from 2027 and completely ended by 2032.
• EU ETS will be expanded in a way to include maritime transport. On January 1, 2024, a new system called EU ETS-2 will be introduced for buildings and road transport. Citizens will not be included until 2029.
• The target of reducing carbon emissions by 2030 has been increased from 61% to 63%.
• Starting from 2025, a reward and punishment system (bonus-malus system) will be introduced in which those who make efforts to reduce carbon emissions will be rewarded with additional free allowance and those who produce more emissions will lose some or even all of their free allowances.
• Revenues will be used only for climate actions taken in Europe and member countries.

As stressed in our previous articles, the CBAM, which is planned to be implemented earlier than expected, is encouraging for reducing emissions and investing in sustainable projects. Since Turkey exports predominantly to EU countries, it is a development that Turkey and Turkish companies cannot ignore. Having said that, considering the latest developments and decisions taken at the Climate Council held last February at which we and relevant public and private sector representatives and lecturers participated, it is essential to enact the Draft Law on Climate Change and to implement other relevant regulations and the market-based mechanisms similar to those used in EU- in Turkey as well and also the incentives to be provided to support climate actions as soon as possible. It is also important for Turkish companies to speed up their preparations for climate change in light of the recent developments.