Opinion piece by European Commission Director-General for Taxation and Customs Union, Gerassimos Thomas, ahead of meetings in Japan

In recent years, natural disasters in both Japan and the EU have made our citizens acutely aware of climate change’s devastating effects.  Fighting their drivers requires bold and decisive action. The strong relationship between the EU and Japan can help accelerate this work.

Carbon pricing is a climate change mitigation tool with proven success. In the EU, the pioneering EU Emissions Trading System (ETS) has been in place since 2005, helping to reduce emissions from power and industry plants by 37%. And on 1 October, we began implementing the ground-breaking Carbon Border Adjustment Mechanism or CBAM in its transitional phase.

The new CBAM has two goals: to prevent so-called ‘carbon leakage’, or the relocation of production outside EU borders to countries with lower environmental standards, and to encourage industry worldwide to embrace greener technologies. Designed to be compatible with World Trade Organization rules, CBAM is not about trade protection, but protecting EU and global climate ambition, as determined at COP.

CBAM is being introduced in a logical, gradual and predictable manner. Its two-and-a-half-year transitional phase will last until the end of 2025. During this period, EU importers of CBAM goods (iron and steel, aluminium, cement, and fertilisers, as well as hydrogen and electricity) sourced in non-EU countries will only need to provide certain information on the carbon intensity of their products.

Japan is an important EU trading partner. But Japan’s exposure to the CBAM sectors is mostly concentrated in the steel sector, which represents about 3% of the total value of Japanese exports to the EU. Exports of iron and steel to the EU represent 1.5% of national crude steel production, though that figure is growing.

The European Commission has provided extensive sector-specific guidance for industry on how CBAM will work during the transitional phase. We are also engaging with non-EU businesses, so they understand their role. But we will ensure that the burden on Japanese firms is no higher than that of EU producers.

When designing the CBAM, it’s important to us that we do so in the fullest transparency. That’s why we welcomed a number of international observers, including Japan, during the design of the CBAM’s transitional phase. In mid-2025 we will draw the lessons of this period, using the information gathered to refine the methodologies and the definitive regime before the entry into force  in 2026.  As of that time, importers to the EU will begin buying and surrendering ‘CBAM certificates’ based on the embedded emissions of their imports. We will also look at possibly extending the scope to a limited number of additional sectors at risk of carbon leakage which are also covered by the EU ETS. CBAM will never cover more than a small fraction of our trade with Japan.

We will once again value the input of Japan’s policymakers and business towards the definitive regime’s design. We will listen to all feedback and concerns so that we can increase mutual understanding and reduce reporting burden for Japanese companies concerned. It’s my privilege to visit Japan this week to get the ball rolling with interlocutors in the Japanese government, business and civil society.

We recognise Japan’s regional emissions trading systems and strongly welcome the GX initiative through which Japan has committed to carbon pricing as a key decarbonisation instrument. Effective carbon prices or taxes already paid in the country of production can be deducted from the CBAM payment.

For our part, the EU remains fully engaged in international discussions in this area. We particularly look forward to working closely with Japan in the dedicated OECD Inclusive Forum on Carbon Mitigation Approaches and the G7 Climate Club.

Because we all have the same goals when it comes to climate change. As this important new climate measure takes effect, we want to work with our international partners to make sure we can all learn and reap the benefits.

Gerassimos Thomas is Director-General for Taxation and Customs Union at the European Commission

Find out more about the EU CBAM here