How does CBAM interact with the EU Emissions Trading System (ETS)?
The European Union Emissions Trading System (ETS) stands as a pioneering global initiative, serving as the cornerstone of the EU’s climate action agenda. Here’s how CBAM aligns and interacts with the EU ETS:
- ETS Overview: The EU ETS places a cap on greenhouse gas emissions from power production and large industrial installations, requiring the purchase of allowances on the trading market. While some allowances are freely allocated to prevent carbon leakage, their quantity diminishes over time for all sectors, including CBAM sectors.
- Progressive Introduction of CBAM: As the EU reduces free allowances to incentivize decarbonization, CBAM is gradually introduced. From 2026, the decline in free allowances accelerates for CBAM sectors, maximizing the impact of the ETS in achieving ambitious climate goals. Concurrently, the CBAM financial adjustment is phased in according to a predefined schedule.
- CBAM Certificate System: CBAM operates on a certificate-based system reflecting embedded emissions in imported CBAM products. Unlike the ETS, CBAM is not a ‘cap and trade’ system and allows the purchase of an unlimited number of certificates. However, the price of CBAM certificates mirrors the ETS allowance price.
- Transition to Full CBAM Regime: By 2026, when the CBAM regime is fully operational, it will adapt to changes in the EU ETS, particularly the reduction of available free allowances in CBAM-covered sectors. Until the complete phase-out of free allowances in CBAM sectors by 2034, CBAM will only apply to emissions not covered by free allowances under the EU ETS. This ensures equitable treatment between importers and EU producers.
Dubrink simplifies the alignment between CBAM and the EU ETS, providing importers a seamless platform for navigating evolving regulations and reporting requirements. With our software, businesses can efficiently manage the transition to CBAM while maintaining compliance with ETS regulations.