Issue link: https://digital.shearman.com/i/1425143
S H E A R M A N & S T E R L I N G L L P | 2 9 the ETS. However, first, the EC will need to revise the rules which disincentivize electrification in certain sectors. CARBON BORDER ADJUSTMENT MECHANISM ("CBAM") Proposals The CBAM intends to impose a carbon price at the European border to imports of certain products, based on their embedded GHG emissions. It aims to prevent 'carbon leakage': economic behaviour caused by the ETS and other European climate regulation in which producers relocate production outside Europe to avoid the increasing costs of environmental compliance. The CBAM is designed to set an equivalent carbon price on imports to the price that must be paid by European producers under the ETS, thereby maintaining compatibility with World Trade Organization ("WTO") non- discrimination rules. Key features of the CBAM include: • it applies initially to imports of cement, iron, steel, aluminum, fertilizers (including ammonia) and electricity; • parties only need to purchase CBAM certificates (from 2026) for direct (i.e., scope 1) emissions, while reporting on both their direct and indirect (i.e., scope 2) emissions; and • free allowances under the ETS will be phased out for the relevant sectors between 2026 and 2035. CONTINUED >