As the cat seems to be out of the bag, and most people following EU #CBAM discussions have seen some draft of the proposal, let me share with those out of the loop some info on the structure of the proposal. /Thread

First, CBAM will first apply to 4 pre-selected sectors., listed in Annex I These are - for the time being - electricity, fertilizer inputs plus some selected fertilizers, cement, many iron & steel products, plus aluminum 1/n

Cant speak for other products, but for fertilizers, the list is clearly too short. Main inputs (ammonia + nitric acid) and only two finished products: urea and some ammonium nitrate. 2/n

This wont satisfy the industry which wants the entire chapter (31), including all nitrogen fertilizers (including CAN, UAN, ammonium sulfate) plus compound fertilizers (NPKs, including DAP & MAP). 3/n

For steel products, the list is pretty long, including semi-finished products, flat (hot & cold), long products, angles & shapes and wire). 4/n

The sectors are hopefully based on an Impact Assessment that will be released with the proposal. Hopefully, the key to selection of the sectors will be spelled out there. 5/n

The Commission will be able to add & remove sectors by a delegated act. 6/n

Second, for physical goods, CBAM will cover all "embedded emissions", which include both direct & indirect emissions. This - in my view - is the big surprise. Indirect emissions are quite tricky and may lead to multiple problem. But steel & aluminum will be happy. 7/n

The detailed calculation of embedded emissions for goods and electricity is broadly described in Annex III, but will be laid out in detail in implementing acts adopted by the Commission. 8/n

Third, it seems that CBAM will be paid not during importation, but annually (end of May). Importers will then file a declaration setting out how much they imported the past year, and how many emissions they had and CBAM will need to be paid. 9/n

Fourth, what most long suspected has been confirmed. #CBAM will be paid in special "CBAM certificates" purchased at an official price, equal to the average closing prices of all EU ETS auctions for the prior week. This price will get published in the OJ. 10/n

These certificates will be surrender annually, with the reminder (excess) repurchased annually at the purchase price or cancelled. Details of this process to be set out in implementing acts. 11/n

Fifth, it appears EC is proposing a special licensing scheme for CBAM-covered goods. Only "authorised declarants" will be able to import goods subject to CBAM. Customs authorities will need to enforce this during customs procedures.

Sixth, EU is creating a special agency (surprise, surprise...) to administer CBAM: the CBAM Authority. They will issue import authorizations, handle CBAM declarations, sell CBAM certificates, run the CBAM Registry (database of importers & their CBAM accounts), ... 13/n

... accredit verifiers (more on this further below), review CBAM declarations, sell, repurchase and cancel CBAM certificates, decide to carry out on-spot verifications and do all the other wonderful CBAM things. 14/n

Seventh, it appears that EC has gone for third party verification of "embedded emissions". The annual filing of each declarant will have to be verified by a "verifier" accredited by the CBAM Authority. Some rules in Annex V, rest to be set out in implementing acts. 15/n

Eighth, "embedded emissions" as presented to the CBAM Authority for purposes of paying CBAM must be based on actual values, as confirmed by the verifier. Only if these cannot be verified, default values apply. 16/n

Default emission values are quite punitive - 10% of the worst EU performers (sort of EU benchmark for free allowances in reverse). So there is some incentive to provide real data. 17/n

Ninth, the CBAM Authority can decide to do an "on-spot verification" to confirm the emissions as verified by the verifier and officially register them in the CBAM Registry. Such an inspection ends with a decision by the CBAM Authority, which is then valid for two years. 18/n

As proposed by the Commission, only the operator in the 3rd country can request their own registration, but I suspect there will be a major push by EU industry to allow them to petition the EC as well. 19/n

Tenth, declarant can deduct from their declaration the carbon price paid in 3rd country for the declared emissions. Sufficient evidence must be presented and accurately certified by "competent independent person". No clue who that is. Probably implementing regs will clarify. 20/n

Also, EU may enter into sectoral agreements with 3rd countries to take account of pricing mechanisms in these countries. 21/n

Eleventh, the CBAM Authority may require a security deposit from new or suspicious importers to ensure CBAM will be paid at the end of the year (amount to be estimated guess by CBAM Authority). 22/n

Twelfth, a few words on enforcement. Customs authorities will ensure that all importers of goods covered by CBAM are registered with the CBAM Authority. They will periodically communicate on the volumes of imports, countries of origin, etc. 23/n

Importers that fail to file their annual declarations will be subject to a penalty 3x average CBAM certificate price (plus still need to submit CBAM certificates). Repeated offenders may be suspended. 24/n

Thirteenth, there is an anti-circumvention provision. Its bit fuzzy & imprecise. Seems based on trade defence: if trade patters among countries/companies change w/t sufficient economic justification, products only slightly modified to avoid CBAM can be added to sector list. 25/n

But its unclear if this also applies to transhipment (for example, to use another country's energy mix to get a lower CBAM value). Also, no clear answer to the problem of "resource shuffling", though maybe it would be treated like "circumvention" 26/n

Fourteenth, I forgot to mention it earlier when discussing embedded emissions: it appears that when no individual assessment is claimed for indirect emissions, they will be based on the energy mix of the host country. EC will publish a list annually. 27/n

Fifteenth, for the first 3 years, CBAM will apply in a transitional, simplified mode. The biggest difference is EC will play the role of CBAM Authority and CBAM to be calculated on default values. Importer may later request a reimbursement if it can prove lower emissions. 28/n

Finally, a few very important points. A/ Free allowances & indirect ETS compensation. The proposal notes in the introductory article that CBAM is "an alternative" to existing carbon leakage measures.

It also provides that the number of CBAM certificates to be surrendered at the end of the year will be reduced to the extent free ETS allowances are granted to the domestic industry in this sector. So in practice, the proposal is structured to coexist with free allowances.

I could not find a provision that seeks to deal similarly with indirect ETS compensation, so it seems there may be a WTO issue there, as some EU producers get their indirect costs reimbursed, while imports would pay the full price, but....

Lets not kid ourselves. We all know EC will try to take away both the free allowances, and the indirect ETS compensation from CBAM sectors (and non CBAM as well) when it proposes ETS revision.

So the most difficult (politically) part of CBAM will be dealt with not in the CBAM Regulation proposal, but in ETS revision proposal. 33/n

Important caveat: this is based on one draft circulating. It is not final. It may get changed and amended. The proposal is entering inter-service consultations so a lot can happen. But this should give everyone a good idea of what's on the table. To be continued! 34/34