European Union Debates CBAM Expansion - Including Controversial Article 27a

Over the last several months, the topic of whether the Carbon Border Adjustment Mechanism, otherwise known as CBAM, should be amended and expanded has been up for debate. CBAM is an EU Green Deal policy designed to prevent "carbon leakage" - a term used to describe the process by which companies move their production to countries with more lax emission rules. CBAM would add a tax on carbon-intensive imports such as steel, aluminum, fertilizers, electricity, and hydrogen, ensuring that they pay comparable carbon prices as EU-produced goods. EU importers must report on the embedded emissions in their in-scope products and purchase certificates to cover those emissions. If a carbon price was already paid in the country of origin, it can be deducted from the cost of the CBAM certificates.

This week, the European Council's position on the Commission's December proposal leaked, most notably their response to the controversial Article 27a: "Serious and Unforeseen Circumstances". Here's what you need to know.

What is Article 27a?

If agreed upon by the EU, Article 27a would give the Commission the power to determine whether the inclusion of certain goods under CBAM "severely harms the Union internal market, including through a disruption of the functioning of the supply chains or a distortion of prices formation, due to serious and unforeseen circumstances." It would therefore empower the Commission to adopt delegated acts to amend Annex I of the adopted text to exempt those goods from CBAM obligations.

In response to the Commission's proposal to include this article in the CBAM expansion, the Council aims to implement certain guardrails to these powers. First, the Council's proposal notes that the exemption for goods should be temporary, and only apply for a full calendar year. If the delegated acts apply before October 31st, the temporary exemption shall apply from January 1st to December 31st, and it may only be extended once for the following calendar year by way of delegated acts. If the delegated acts apply after October 31st, the temporary exemption may apply from January 1st until either the end of the calendar year or until the end of the following calendar year.

Second, any amendment to exclude certain goods shall take the form of a footnote in the associated delegated act inserted next to the CN / HS codes of the relevant goods, and, most critically, the Commission cannot re-use the same justification for exempting certain goods for multiple years. "The footnote shall state that CBAM shall not apply to the goods in question and specify the year or years of the exemption. Goods shall not be exempted for more than two years under the same 'serious or unforeseen circumstances'. Once the exemption period ends, the Commission shall remove the footnote and promptly publish information about the deletion in the Official Journal of the European Union."

Finally, while the Commission's proposal would have allowed them to exempt a good "until serious and unforeseen circumstances have passed", the Council's proposal deletes this language and instead opts for a time limitation on exemptions, with goods being re-introduced at the conclusion of this time period should the Commission fail to produce new reasoning for why the exemption should continue.

How will the EU define: 'severe harm', 'serious and unforeseen circumstances', 'disruption of the functioning of supply chains' or 'distortion of prices'?

Stakeholders who object to the Commission's inclusion of Article 27a note that neither the Commission nor the Council have publicly defined their interpretations of several key terms included in the Article, leaving open the possibility of broad interpretation. If the Commission over-utilizes this power and exempts the majority of CN codes covered under CBAM, it risks weakening the law.

This ambiguous terminology and lack of clarity grants the Commission broad flexibility of interpretation, which in turn can lead to a lack of clear standards for importers. Furthermore, this lack of clarity risks undermining the integrity and credibility of CBAM as a piece of environmental legislation. Making CBAM rules overly flexible by exempting too many products from its scope weakens its ability to meaningfully address carbon leakage or to create incentives for emissions reductions by third countries.

What comes next

The Council, Commission and Parliament must ultimately reach an agreement on a single proposal to expand and amend CBAM. Additional changes are expected as negotiations continue and stakeholders make their positions clear.

To learn more about the EU's Carbon Border Adjustment Mechanism, or to speak with a member of our policy team to learn how CBAM may impact your business, reach out today.