The EU is set to apply a carbon border tax on imports of hydrogen and H2-derived products such as ammonia and methanol, after the European Parliament agreed a late-night deal with other branches of government to include it in a key piece of European carbon leakage legislation.
The carbon border adjustment mechanism (CBAM) is poised to apply to all hydrogen products entering the EU from the start of the transition period in October 2023, along with a host of other products including iron, steel, cement, aluminium, fertilisers, electricity and screws and bolts.
Hydrogen was not originally included in the list of products covered by the CBAM launched by the European Commission (EC), but the European Parliament began lobbying for its inclusion in the summer to “raise global climate ambition”.
Hydrogen Europe, which represents around 400 of Europe’s blue and green hydrogen developers was relatively relaxed about the practical implications, noting that significant imports of carbon-intensive H2 are unlikely.
But the organisation warned that last night’s deal is low on detail, and called for a pragmatic approach to taxing H2 imports under the CBAM by reducing the administrative burden, carrying out impact assessments and ensuring that hydrogen and its derivatives are not taxed under one umbrella.
“From last night’s deal, we know hydrogen would be covered by the mechanism, yet, without the final document, we know little about whether these conditions will be met,” a spokesperson for Hydrogen Europe told Hydrogen Insight. “Ensuring they are indeed met will be our battle for the coming days and weeks.”
The trade body also called for the scheme to be extended to electrolysers. European manufacturers have been sounding the alarm for some time over being undercut by cheap imports that do not meet the same sustainability and labour standards.
How it works
Under the CBAM scheme, importers of these products will be required to pay the difference between carbon taxes paid in the country of origin, and the price of emissions allowances under Europe’s carbon trading scheme, the Emissions Trading System (ETS).
Exporting countries with “the same level of carbon ambition as the EU” would be exempt from the CBAM.
The EU’s stated aim is to incentivise decarbonisation outside the EU’s borders, but it will also have the effect of protecting European producers from being undercut by importers who don’t have to pay carbon taxes at home. However, the scheme is compliant with World Trade Organisation rules, the EU Parliament insists.
No details have been given for the length of the transitional phase of the CBAM, starting in October 2023, but officials have said it will be timed to coincide with the phase out of free emissions allowances for Europe’s carbon intensive industries.
During the transition phase importers will be required only to report their emissions, without paying the CBAM charge.
The timing and enaction of the deal is now dependent on the outcome of the on-going overhaul of the ETS.
Last week, the EU agreed to phase out free allowances for the aviation sector from 2026, as well as a package of €1.6bn ($1.7bn) to support the rollout of sustainable aviation fuels (SAFs), some of which are derived from hydrogen.
“CBAM will be a crucial pillar of European climate policies,” said Dutch rapporteur Mohammed Chahim. “It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry. On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the polluter pays principle to our own industry.”
