Objectives of CBAM
Under the European Green Deal, the EU is working to build a sustainable economy. As regulatory conditions become more stringent there is a risk that companies will move production of carbon intensive products outside the EU to avoid regulation, known as carbon leakage. To address this, the EU has developed a Carbon Border Adjustment Mechanism (CBAM).
This instrument places a fair price on the embedded emissions on imports of carbon intensive goods into the EU. This will discourage carbon leakage and also encourage other countries to adopt more stringent regulations.
Whilst not officially a tax, CBAM could be considered to be a carbon tax on the goods imported which are in scope for the regulation.
Key Elements of CBAM
There are a range of products which are included in CBAM. These are detailed in annex I of the regulation and are identified through the process using their Combined Nomenclature (CN) codes. These products are:
Cement
Electricity
Fertilisers
Iron and Steel
Aluminium
Hydrogen
There are some exceptions within some categories, a full list of CN’s can be found in the annex.
For Iron and Steel, Aluminium and Hydrogen only direct emissions are to be considered for some CN’s. For all other products direct and indirect emissions are to be reported.
The method of calculation for emissions has been defined by the EU within the regulation in Annex IV.
To account for emissions, importers need to work with producers to calculate the direct and indirect emissions embedded within the products. When importing, those emissions need to be accurately reported along with the identity of the facility where the products were produced and the country.
Importers will be able to purchase CBAM certificates from national authorities. The price of the certificates will be linked to the EU ETS.
When declaring emissions on import, the importer will be obliged to surrender the relevant value of certificates relevant to the embedded emissions in the volume of products imported.
phases of implementation
CBAM is in a transitional phase until the 31st December 2025. From the 1st January 2026, CBAM will enter into its definitive phase.
The transitional phase introduces some initial obligations on importers. They must now submit reports every quarter through a registry which has been developed by the EU.
These reports will include the CN’s of products imported, the production facilities, the countries, the calculated emissions and any carbon price already paid in the country of production.
During this phase, there are no certificates required, meaning there are no CBAM fees payable. The information on carbon price already paid will still be required to assist in defining appropriate compensation mechanisms for the definitive phase.
The definitive phase enters into force on the 1st January 2026. From this date onwards, importers will also have to purchase and surrender the relevant certificates for their imports.
The CBAM price will remain linked to the ETS. Any carbon prices already paid outside of the EU will be taken into consideration and the CBAM value will be adjusted to reflect this.
Actions for Companies
CBAM will represent an additional cost for businesses, directly and indirectly. There are a range of things companies must act on now to integrate CBAM into their business.
To comply with the regulation, companies who import CBAM products should be submitting quarterly reports to the EU registry. If this is not the case, this needs to be remediated urgently or risk penalties from regulators.
The accuracy, consistency and validity of data will be important. Working with suppliers is essential to establish reliable data flows to feed into the CBAM processes. Where possible these should be automated to minimise the effort required.
For some companies a customs representative within the EU will be required. This will be relevant for non-EU companies selling directly into the market and for some EU companies who will use the support of representatives to administer their imports.
A broader review of imports should be initiated. CBAM offers an opportunity during the current transition phase to reassess the benefits of importing goods. The carbon intensity of different countries and producers will be significant and play a role in procurement decisions. Seeking supply from within the EU, other regions, or different operators may now be more effective.
Supplier Engagement
Importers of goods into the EU will rely on their suppliers providing carbon data for their products. This can be problematic as many suppliers have limited or no information to provide. Working with suppliers to improve information is crucial to avoid the use of default values. In our experience, the default values are as much as a third higher than the actual values for most products. A significant cost risk to the business.
We’ve put together guidance to help companies work with suppliers to improve CBAM information. Read our CBAM for Suppliers here.
We Can Help
We provide companies with a range of services to help them integrate CBAM into their business. Our services include impact assessment, strategy development, business process design, supplier and data management.
Contact us to talk to one of our team.
