The members of the European Parliament have reached a deal to implement the Carbon Border Adjustment Mechanism (CBAM) effective 2023, to incentivize non-EU countries to enhance their climate goals and ensure the region’s efforts are not undermined by production being relocated to countries with less competitive policies.

The regulation will initially cover iron and steel, cement, aluminum, fertilizers, and electricity. It will be extended to hydrogen, indirect emissions under certain conditions, specific precursors, and some downstream products such as screws and bolts and similar articles of iron or steel.

The fast-forwarded CBAM regulation intends to assess companies and their products being imported into the EU for indirect emissions.

The first-of-its-kind bill, which complies with the World Trade Organization rules, will be applicable from October 1, 2023. The bill provides for a transition period where the obligations of the importer will be limited to reporting.

Before the end of the transition period, the Commission would assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal of including all goods covered by the Emissions Trading System (ETS) by 2030.

The Indian industries, including the commercial and Industrial (C&I) segment, especially those exporting aluminum, iron, and steel to the EU, will have to meet these standards much faster than before.

Even though the segment has seen considerable adoption of renewables, a majority still has to make the transition.

With the CBAM regulations advanced to October 1, 2023, companies in countries like India will have to fast forward their sustainability goal timelines to continue their exports.

CBAM is set up to equalize the price of carbon paid for EU products operating under the ETS and the one for imported goods. It will be achieved by obliging companies that import into the EU to purchase CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in ETS.

The EU member states and parliamentarians recently agreed on a significant ETS reform to help reduce emissions and encourage investments in climate-friendly technologies.

CBAM is part of the “Fit for 55 in 2030 package,” which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.

Parliament and Council must approve the agreement before the new provision becomes law.