Navigating the EU's Carbon Border Adjustment Mechanism (CBAM)

As the European Union takes bold steps to combat climate change, the Carbon Border Adjustment Mechanism (CBAM) is emerging as a key component of its strategy. An integral part of the European Green Deal, the CBAM aims to level the playing field for EU producers and importers in the face of carbon costs. The first reporting period has just passed, so we can take a look at the reporting requirements. This article provides an overview of the requirements companies need to meet to stay on track.

The Carbon Border Adjustment Mechanism is a policy tool designed to tackle the problem known as 'carbon leakage'.

Carbon leakage occurs when companies move the production of goods to countries with less stringent emissions standards, often resulting in a net increase in overall emissions.

The Regulation applies to importers of certain goods into the EU and imposes new reporting and compliance obligations. By aligning with the EU's broader environmental objectives, CBAM ensures that imported goods bear a similar carbon cost to products made in the EU, thereby extending the reach of the EU ETS (European Union Emissions Trading System).

The Regulation came into force on 1 October 2023, with the start of a transitional period during which importers (known as CBAM declarants) are required to submit quarterly reports to CBAM on imported goods and the emissions they contain. This phase will focus on high-emitting sectors, including cement, fertilisers, iron and steel, aluminium, hydrogen, and electricity. The importer must register as an approved declarant by 31 December 2025. This date is also the end of the first phase.

Full implementation will start on 1 January 2026. It will be necessary to purchase CBAM allowances and verify reported emissions. From 2030, CBAM will be extended to the remaining industries currently covered by the EU ETS (including electricity, and other energy-intensive industries).

If your business is in one of these sectors or if you're an importer of these goods, it's important to understand and prepare for the implications of CBAM.

The reporting obligation falls to the so-called authorised declarants. These are importers into the EU who release the goods in question into the EU. The importer's indirect customs representative can also report, if agreed.

From October 2023, with the first quarterly report having been published by the end of January 2024, declarants had to report for each supplier, for each type of imported CBAM good, both the direct and indirect emissions embedded in the product and the carbon price paid abroad. Under the CBAM legislation, by direct emissions we mean emissions from the production processes of goods, including emissions from the production of heating and cooling that is consumed during the production processes, irrespective of the location of the production of the heating or cooling. Indirect emissions cover the production of electricity consumed during the production of CBAM goods. The EU Regulation also specifies the methodology for calculating the contained emissions.

Until the end of 2024, companies will have the choice of reporting in three ways:

(a) full reporting according to the new methodology (EU method);

(b) reporting based on an equivalent method;

(c) reporting based on default reference values (until July 2024 only).

In addition, up to 20% of the embedded emissions of complex goods may be determined by an estimate provided by the operators of the installations.

From 1 January 2025, only the EU method will be accepted.

From 2026 onwards, the declarant will have to purchase CBAM certificates from the CBAM Authority according to the previously calculated embedded emissions of imported CBAM goods. One CBAM certificate will correspond to 1 tonne of CO2 (equivalent) embedded in the imported goods. The importer is then required to prepare and submit the annual CBAM report, the first of which is due on 31 May 2027. Thereafter, the importer is required to sell the excess CBAM certificates (based on the CBAM report submitted by the importer) before 1 July. CBAM Certificates are calendar year specific (so the importer must start again on 1 January for the next year) and there are limits on how many can be surrendered in any given year.

Companies should assess their supply chains and consider the potential cost implications. Adapting sourcing strategies or investing in cleaner technologies may be necessary to mitigate the impact of CBAM. In the first few years, the price of goods is likely to increase as the supplier compensates for the additional administrative burden. This needs to be taken into account so that importers or consumers do not bear the entire financial burden.

To help you navigate this complex regulation, we have prepared a 5-step action plan to help you comply with CBAM:

Task: Identify and categorize the imported goods according to the Combined Nomenclature (CN) system, the EU standard for describing and categorising goods for import/export, in order to understand which imported goods are subject to CBAM reporting.

Task: Liaise with your non-EU suppliers in order to obtain detailed carbon footprint and production process data.

Task: Identify the appropriate local authority to apply to and prepare the application to obtain Official Declarant status for CBAM reporting purposes.

Task: Aggregate and analyze supplier data and CN classifications. Add the carbon footprint for each product category. Then compile and submit the CBAM report in accordance with EU regulations.

Task: Develop internal guidelines for regular data collection and reporting. Review and renegotiate supplier contracts to include clauses to mitigate potential financial loss.

By following this action plan, the company can ensure effective compliance with the CBAM regulation, maintain good relations with suppliers, and potentially improve its environmental and sustainability profile.

The EU has been at the forefront of the global fight against climate change, introducing increasingly ambitious and sophisticated policies, all aimed at achieving carbon neutrality by 2050. The introduction of CBAM is just one of these measures. It presents challenges, but also an opportunity for businesses to lead the way in sustainability and innovation. By understanding and preparing for CBAM, companies can not only comply with new regulations, but also advance their ESG goals and ensure a more sustainable and profitable future.

This blog post provides a concise yet comprehensive overview of CBAM, focusing on its impact, compliance requirements and strategic implications for companies.

Do not hesitate to contact us if you have any further questions on how to develop an ESG strategy and comply with reporting requirements not only for this legislation, but also for other sustainable finance legislation.