The alignment of free allocation under the EU ETS with CBAM

As already described in the issue two weeks ago, CBAM is a cost factor for companies. This new emissions trading system attaches a price tag to CO2 emissions in the supply chain for the first time. The price depends on several factors. I have already discussed the basics in the previous issue. Furthermore, the cost burden is largely determined by the free allocation of certificates under the European Emissions Trading Scheme.

The free allocation of allowances under the European Emissions Trading System

Under the European Emissions Trading System, affected companies must surrender one EU ETS certificate for every tonne of CO2 they emit. To prevent companies that are particularly exposed to the pressure of international competition from migrating due to cost pressure, they are allocated some of their necessary EU ETS allowances free of charge. With this mechanism the EU already has an instrument in place to prevent CO2 emissions from being shifted abroad.

Link with CBAM

The European Commission must also consider the allocation of these free certificates within the framework of CBAM. To this end, it is gradually reducing the allocation of free certificates. Accordingly, it is also only gradually introducing the obligation of CBAM certificates. The Commission is using the so-called CBAM factor to coordinate these two emissions trading systems.

The CBAM factor and free allocation

According to the latest update of the Commission's FAQs (question no. 123), the cost burden for companies affected by CBAM can be calculated as follows: You take the emission burden of the product you are importing. From this, you can now deduct the emissions that have been defined as the CBAM benchmark for this product. This corresponds to the free allocation of EU ETS certificates, so to speak. These emissions should therefore also be free of charge for importers. However, the CBAM benchmark is now multiplied by the CBAM factor before it is deducted from the emissions load. As the CBAM factor decreases over the years (e.g. in 2026: 0.975; in 2028: 0.90; in 2030: 0.515), the number of emissions that you are allowed to deduct from the emissions embodied in the imports also decreases over the years. In 2034, when the CBAM factor has fallen to zero, you will then have to buy CBAM certificates for the entire emissions load and therefore pay the full amount. Accordingly, there will no longer be any allocation of free EU ETS allowances at this time.

Details are still unclear

However, the exact circumstances of how the free allocation of EU ETS allowances is to be brought into line with CBAM have not yet been defined in more detail. A further implementing regulation remains to be seen. This is extremely unfortunate for companies, because without this, no reliable statement can be made about the cost burden. This is because the CBAM benchmarks, which are not yet known, are ultimately decisive.

Support with cost analysis

If you have any difficulties with the cost analysis for your company or with the procurement of emissions data, you are welcome to contact us directly at any time (helge@kolum.earth). We will be happy to support you.

Best regards

Helge Wieggrefe