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July 07, 2021

Preliminary EU CBAM Proposal: Both Green and Blue Ammonia Incentivized

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PRELIMINARY EU CBAM PROPOSAL: BOTH GREEN AND BLUE AMMONIA INCENTIVIZED

Key Takeaways

The preliminary draft CBAM proposal from the European Commission that became public last month:

  • envisages the continuation of the “free” allowances of carbon credits to European ammonia producers up to the benchmarks under the ETS;
  • imposes the same carbon costs on importers of ammonia as those faced by EU-based producers by requiring importers to acquire and surrender CBAM certificates for carbon emissions only to the extent that they are in excess of the benchmarks; and
  • preserves for European “green” and “blue” ammonia producers (provided their emissions are below the benchmark) the ability to monetize their increasingly valuable “free” allowances.

This is good news for importers into Europe of “green” and “blue” ammonia, as they should escape the additional costs imposed by the need to purchase CBAM certificates provided their emissions are below the benchmarks. It is even better news for domestic EU ammonia producers who will benefit from a level playing field and continued “free” allowances. This good news is, however, subject to the final publication of the CBAM proposal and amendments to the ETS, which are due to be published on July 14, 2021.

Further Background

Producers of ammonia in the European Union (EU) are subject to the Emissions Trading System (ETS) and are currently allocated free allowances of carbon credits based on benchmarks calculated by reference to the 10 percent lowest emitting ammonia producers in the EU. This system:

  • encourages producers to limit their emissions to the current benchmark to avoid the need to purchase additional credits;
  • seeks to protect domestic EU producers against carbon leakage, the phenomenon where prices of European produced goods are undercut by imports from third countries with less stringent carbon regulation and consequently lower carbon costs for producers; and
  • allows producers with lower carbon emissions (including producers of “blue” ammonia where the carbon is captured and safely stored in accordance with the EU regulatory framework) to monetize increasingly valuable free allowances.

In March 2021, the European Parliament passed a resolution to support the introduction of a Carbon Border Adjustment Mechanism (CBAM) that would impose a carbon price on imports of certain goods, including ammonia, from less climate-ambitious countries. While the resolution left the precise means of implementation to a future European Commission regulation, the resolution set out the European Parliament’s clear intent to create a level playing field for producers of ammonia (by applying the same carbon costs to importers and to domestic EU producers) while at the same time improving climate action.

While the methods of implementation of the CBAM are still under discussion, last month, a preliminary draft of the CBAM regulation from the European Commission unexpectedly became public, and we have reviewed it carefully. Under this draft proposal, the CBAM will integrate with the ETS by applying an equivalent regime to certain imported goods (including ammonia meeting the specified definitions). As such, importers of ammonia would (subject to various offset rights) have to purchase and surrender CBAM certificates sufficient to cover the carbon emissions of the ammonia imported at a price determined by reference to the ETS price payable by EU producers.

That said, it appears from the proposal that the system of allocation of free allowances under the ETS will continue in the immediate term, which is good news for European producers and consumers of ammonia. The draft proposal effectively retains the status quo for ammonia producers in the EU but imposes obligations on importers to purchase CBAM certificates. Importers of ammonia will, however, be eligible for a reduction in the CBAM certificates they are required to surrender equal to the ETS free allowance benchmark that applies to their EU peers (i.e., it gives importers an exemption from the need to purchase and surrender CBAM certificates to the extent they would have received free allowances had they been subject to the ETS). Such reduction would apply not only to producers of “green ammonia” but also “blue” ammonia where the carbon is captured and safely stored in accordance with the EU regulatory framework and their resulting emissions are below the benchmarks (assuming carbon capture and storage technology is treated in the same way under the CBAM as it currently is under the ETS). It appears that this approach will continue for as long as there is allocation of free allowances under the ETS, which is currently in its fourth phase and applies to 2030.

Such a methodology appears to achieve the double objective of creating a level playing field between domestic EU production subject to the ETS and imports that will be subject to equivalent measures pursuant to the CBAM, while at the same time promoting decarbonization in the EU and beyond. The level playing field would benefit all EU producers of ammonia. The climate action in the EU is promoted by continuing to provide EU domestic ammonia producers with carbon emissions lower than the benchmark with the ability to monetize their increasingly valuable “free” allocation (which appears not to be possible for importers under the CBAM). Finally, the decarbonization beyond the EU’s borders is encouraged by exempting importers of “green” and “blue” ammonia (to extent their emissions are below the relevant benchmarks) from the need to purchase onerous CBAM certificates.

While the trajectory is favorable for now for all players other than importers of carbon intensive ammonia, the European Commission is also expected to publish a package of revisions to the ETS next month. These revisions are intended to accelerate the decarbonization of the EU economy and may include measures such as further reductions in the number of credits in circulation, expanding the sectors covered by the ETS, adjustments to the “free” allocation rules or changes to the benchmarks for calculating such allocations. The long running suspense as to the interaction between the ETS and the CBAM therefore continues and the current optimism may be short lived.

The European Commission is expected to formally publish the CBAM proposal on July 14, 2021 (together with its proposed revisions to the ETS), and this may ultimately deviate from the draft proposal.

As part of our work on the world’s largest “green” and “blue” hydrogen / ammonia projects, we are at the forefront of the complex and evolving regulatory issues affecting downstream uses of hydrogen, ammonia and other green energy projects, and we are happy to speak with you if you would like further information as these matters evolve.

Authors and Contributors

Lachlan Poustie

Partner

Project Development and Finance

+33 1 53 89 70 80

+33 1 53 89 70 80

Paris

Frederick Lazell

Associate

Project Development and Finance

+44 20 7655 5968

+44 20 7655 5968

London

Kate Buchanan

Associate

Project Development and Finance

+33 1 53 89 71 06

+33 1 53 89 71 06

Paris