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CBAM – European Union Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) is a regulation gaining prominence in the global effort to combat climate change. It’s designed to address the environmental impact of imported goods to EU, ensuring that they meet the same environmental standards as domestically produced items
What is CBAM?
CBAM is a regulation, designed to align imported goods with the EU’s environmental standards. It addresses the following key components:
Carbon Emissions Assessment: CBAM calculates the carbon emissions linked to the production of specific imported goods, measuring their environmental impact.
Carbon Pricing: To ensure fair competition with domestically produced goods, imports are subject to a tax depending on their carbon emissions.
Preventing Unfair Competition: CBAM prevents carbon leakage, where companies relocate to regions with lax environmental regulations to avoid costs.
Encouraging Sustainability: By imposing carbon charges, CBAM incentivizes greener and more sustainable production practices globally.
Overview
On 13 December 2022, the Council of the European Union and the European Parliament reached a provisional agreement on the final text of a Carbon Border Adjustment Mechanism regulation. The compromise text was made public in January 2023. On 18 April 2023, the European Parliament adopted the new Carbon Border Adjustment Mechanism rules.
The CBAM regulation was signed on May 10, 2023, by the European Parliament and the Council. It was published in the Official Journal of the EU L 130/52 on May 16, 2023, and came into force on May 17, 2023.
Under the CBAM regulation, importers of energy-intensive goods will need to pay a levy on their imports. This levy will be based on the price of their emission allowances within the EU Emissions Trading System (EU ETS). The notification requirements of CBAM will begin on October 1, 2023, during a transitional phase. Importers will need to start paying the levy in 2026.
The CBAM, unlike the ETS cap-and-trade system, will not restrict imports or emissions. Additionally, it will not involve carbon permits trading.
Affected Products from CBAM
As of October 1, 2023, the CBAM will begin to operate in its transitional phase. It will initially apply to certain imports from non-EU nations, such as those in the cement, electricity, fertilizer, aluminum, iron, steel, and hydrogen industries. Those one are carbon-intensive and pose the greatest danger of carbon leakage. When fully phased in with this expanded scope, CBAM will eventually collect more than 50% of the emissions in ETS covered sectors. This transitional period’s goal is to act as a learning and pilot period for all stakeholders (importers, producers, and authorities), as well as to gather pertinent data on embedded emissions to improve the technique for the final period.
Except for those that participate in or are connected to the EU ETS (currently, Iceland, Norway, Liechtenstein, Switzerland, and five other minor territories), it covers imports of covered commodities from non-EU nations.
By 2030, the EU Commission intends to broaden the CBAM’s application to all industries involved in EU emissions trading.
Products initially covered by CBAM
Cement
Electricity
Fertilizers
Aluminum
Iron and Steel
Hydrogen
Products with the highest carbon footprint
%45 of EU ETS sectors
High convergence of EU ETS and CBAM
Transition phase of CBAM
The implementation starts with reporting obligation in October 2023. There will only be a requirement for the quarterly reporting of the greenhouse gas footprint of specific products imported into the EU (including direct and indirect emissions) during the transitional phase of CBAM (October 1, 2023–December 31, 2025. A reporting requirement applies for affected companies, although there are no associated costs.
Mandatory registration
Beginning in 2026, it will also be necessary to obtain CBAM certificates to offset the GHG footprint. The cost of these certificates will be determined by the price of carbon under the EU ETS.
Importing CBAM products will only be permitted by registered declarants. The customs authorities of the EU member states are required to keep an eye on the flow of merchandise and to prohibit non-registered declarants from importing CBAM goods. Importers who are required to register may request authorization starting on January 1, 2025.
CBAM would be an additional cost associated with export to the EU market that would ultimately be covered by the exporter or producer. It could have an impact on their marketing approach. In this context, there is no doubt that other countries will also adopt similar regulations to CBAM.
Obligations for importers
- Register with national authorities
- Declare the number of imported goods and their embedded emissions
- Attain the necessary amount of CBAM certificates
- Maintain the compliance documentation
CBAM Certificates
The Carbon Border Adjustment Mechanism requires importers to surrender certificates (CBAM certificates) depending on the embedded emission intensity of products imported into the EU and acquired at a price equal to the EU ETS allowances at any given moment. This is similar to the system of allowances under the EU ETS.
The amount of imported embedded emissions will be compared to the purchased emission permits as part of an annual CBAM declaration. Financial penalties could be applied if not enough certificates have been earned.
According to the report, the Commission calculates the price of CBAM certificates weekly by averaging the closing prices of EU ETS allowances on the single auction platform. After purchase, the Commission will ensure that each certificate is assigned a “unique identification number” and registered to the CBAM declarant’s account.
To ensure that they consistently reflect the growth of the ETS price, CBAM certificates are not tradable nor bankable, unlike ETS allowances. Any divergence could result in price discrepancies that are so great that they could reduce the incentives for decarbonization between domestic and imported goods.
After the date of purchase, certificates remain valid for two years. The sole “transaction” that is permitted on CBAM certificates is repurchasing. Up to one-third of the total certificates bought the previous year may be sold again by an importer to the appropriate authority. As a result, importers should still have some flexibility and be able to reduce their costs without jeopardizing pricing or injecting speculation into the system.
How Greenovation can help
Understanding the combined effect of these regulations on the industry in which you operate is critical. The EU CBAM is associated with significant increases in ambition within the EU ETS, which has consequences for the future carbon price path and the amount of free permits acquired by European firms.
We encourage companies, whether based in the EU or doing business with the EU, to consider developing their own decarbonization strategies. It is important whether to ensure compliance with upcoming legislation or to ensure their operations are future-proof for medium- and long-term global developments
In light of CBAM implementation and the transition period, our expertise can assist in performing supply chain assessments. We can help you with everything from emissions measurement to installation, monitoring, and reporting. It would be our pleasure to assist you with our CBAM reporting service, particularly during the transitional period.
For more information and support on CBAM, please contact us.
Frequently Asked Questions (FAQs)
The regulation has officially been approved and is now in effect. On May 16, 2023, it was published in the EU’s Official Journal. The permanent system will go into effect on January 1, 2026, and the transitional phase will start on October 1, 2023.
Carbon Emissions Assessment:
It begins by assessing the carbon emissions associated with the production of specific imported goods. This assessment uses internationally recognized methodologies to measure the carbon footprint of these products. In simpler terms, it calculates the environmental impact of making those goods.
Carbon Pricing:
Once the emissions are assessed, it imposes a fee or tax on imported goods based on the amount of carbon emissions linked to their production. This fee serves to level the playing field between domestically produced items which are subject to local carbon pricing, and imported products. In essence, it ensures that imported goods don’t have an unfair advantage due to lower environmental standards.
Preventing Unfair Competition:
A primary goal of the regulation is to prevent carbon leakage. Carbon leakage occurs when companies relocate production to regions with lax environmental regulations to avoid carbon-related costs in their home country. It combats this by making sure that companies can’t gain a competitive edge by avoiding environmental responsibilities.
Encouraging Sustainability:
It acts as an incentive for cleaner and more sustainable production practices worldwide. When importers face carbon charges, they have a financial incentive to adopt greener technologies and reduce carbon emissions in the production of their goods. This, in turn, contributes to global efforts to reduce carbon emissions and combat climate change.
Aligning with Domestic Standards:
CBAM is adaptable in that the carbon charges can be adjusted over time to reflect local carbon pricing regimes. This adaptability ensures that it meets developing domestic environmental regulations and carbon reduction goals.
It will initially apply to certain imports from non-EU nations, such as those in the cement, electricity, fertilizer, aluminum, iron, steel, and hydrogen industries, whose manufacture is carbon-intensive and poses the greatest danger of carbon leakage.
The amount of greenhouse gas (GHG) emissions that industrial sites within the EU are permitted to release is capped by the Emissions Trading System (ETS). On the ETS trading market, allowances can be bought.
In alongside the EU ETS, the CBAM additionally applies to imports from outside the EU. Covers more than half of the emissions in sectors subject to the ETS when completely phased in. Under the CBAM, there won’t be a “cap and trade” system like there is under the ETS.
Prices for CBAM certificates will correspond to the weekly averaged price under the EU ETS.
It does not apply to nations outside the EU that take part in the Emissions Trading System (ETS) or nations with carbon markets connected to the EU ETS.
An importer will be entitled to request a decrease in the number of CBAM certificates to be surrendered in the case of nations with comparable carbon pricing, which will be equal to the carbon price already paid in other jurisdictions.
If a third country has an electricity market that is linked to the EU’s internal market for electricity and a technical solution for applying the CBAM to imports of electricity into the EU has not been found, imports of electricity from the country will be exempt from the CBAM if certain conditions are met.
After receiving authorization from the competent authorities in charge of carrying out the regulation, importers are permitted to bring in CBAM goods. The plan stipulates that member nations choose and oversee these authorities. The Regulation’s required actions can be carried out by these authorities with assistance from the European Commission.
The competent authorities are required to set up national registries that contain details about authorized declarants and their CBAM certificates.
By the end of March each year, each authorized importer or representative must submit a CBAM declaration outlining the total amount of goods imported during the previous year, the total embedded emissions per tonne of each category of goods, and the number of certificates necessary to represent the total embedded emissions.
An importer who is compelled to surrender CBAM certifications must apply to become a CBAM declarant. CBAM declarants will be required to open a CBAM account with the EU Member State from which they import and to surrender to that Member State the number of CBAM certificates corresponding to the level of carbon emissions embedded in the products they import, as verified by accredited organizations, every year. In respect to the preceding calendar year, CBAM notifications must be made to the CBAM registry by the end of May each year.
The declarations must include:
– The quantity of each type of good expressed in megawatt-hours or tonnes;
– The total embedded emissions in those products, calculated and verified under the Regulation;
– The total number of CBAM certificates to be surrendered – corresponding to the amount of emissions mentioned above minus any carbon price paid in the source country; and
– A copy of the verification report issued by an accredited verifier.
Organizations must be accredited to carry out CBAM verification in accordance with the method outlined in Commission Implementing Regulation (EU) 2018/2067, which applies to greenhouse gas emissions trading in the Union.
If a carbon price has been paid in the country of origin in respect of the greenhouse gas emissions contained in the goods, the CBAM declarant may request a reduction in the number of CBAM certificates to be delivered equal to the carbon price already paid.
Over the course of the transition reporting period, penalties for non-compliance are possible. The competent authority will impose a monetary fine if a reporting declarant fails to submit a report or fails to revise a CBAM report so that it complies with all applicable requirements in the draft implementing regulation.
Per tonne of unreported embedded emissions, there will be a fine of between €10 and €50. With inflation, as measured by the European Consumer Price Index, this range will rise. The final penalty amount will be determined by the competent authorities taking into account seven variables, which include past behavior, the amount of unreported information, and any voluntary actions made to stop such violations. Reports that continue to be in compliance after more than six months.
Up until two months following the applicable reporting quarter, the reporting declarant may make changes to the CBAM report. It is permitted to make changes to the CBAM report for the first two reporting cycles up until the third CBAM report’s submission deadline.
Foreign exporters of the CBAM items as well as EU importers ought to consider about implementing an internal monitoring system, gathering emissions data, and planning verifications;
- Appointing an indirect customs representative within the EU;
- Tracking domestic carbon prices;
- Listing international installations in the upcoming EU CBAM register.
Additionally, third countries with domestic ETS or other carbon pricing schemes may want to think about contacting the EU institutions in regards to the recognition of such measures.
During the transitional phase, customs authorities will notify declarants of their duty to report information. Depending on who files the customs declaration, the importer or the indirect customs representative will be the declarant.
The following individuals could be in charge of the reporting requirement:
- the importer when the importer files a customs declaration to release goods for free circulation in its own name and on its own behalf; and when the declarant is also the importer and is in possession of a certificate to file customs declarations;
- The indirect customs representative, when the importer is based outside of the Union and the indirect customs representative is designated in accordance with Article 18 of Regulation (EU) No 952/2013; or when an indirect customs representative has consented to the reporting requirements in accordance with Article 32 of Regulation 2023/956.
