What is the Carbon Border Adjustment Mechanism?

With the Carbon Border Adjustment Mechanism, the EU aims to prevent carbon leakage and incentivize decarbonization by its trading partners. Under CBAM, importers must ensure the calculation and verification of the GHG emissions embedded in the CBAM goods they import to the EU, and, for each ton of such emissions, pay a carbon price similar to that under the EU Emissions Trading System (EU ETS). CBAM initially affects imports of aluminium, cement, electricity, fertilizer, hydrogen and iron and steel goods.

CBAM will be introduced in stages: in 2023-2025, importers must collect data on the emissions embedded in the CBAM goods they bring to the EU, and provide a quarterly report to the EU Commission. Starting in 2026, they must also ensure the verification of the emissions data, provide annual CBAM declarations, and gradually begin the purchase of certificates. Financial costs will increase each year as the price of CBAM certificates is linked with the phase-out of free allocation under the EU ETS through 2027-2034.

CBAM affects companies in three key ways: first, importers must prepare CBAM reports and later declarations, must ensure the quality of the data, and face financial penalties for non-compliance. Second, producers of CBAM goods outside of the EU are likely to receive requests for emissions data from customers importing their goods to the EU, and might face pressure to enhanced their emissions monitoring processes. Third, EU-based exporters of CBAM goods might face competitive disadvantage in less carbon-regulated markets due to the phase-out of free allocation. Finally, the requirements of CBAM are likely to raise further supply chain issues as the mechanism is gradually rolled out.

2023-2025: transitional period obligations

Any company importing CBAM goods to the EU must provide their first CBAM report by 31 January 2024 for the fourth quarter of 2023. This report needs to indicate the amount of goods imported, their country and installation of origins, production processes, actual embedded direct and indirect emissions from the production of those goods, as well as information on CO2-price paid in the country of origin (if available). Preparing a CBAM report requires importers to get precise data from their suppliers that meet the strict information requirements outlined by the EU Commission. To some extent, importers can use default values, but only for a limited time.

Thus, importers must go through a complex process involving: 1. An assessment of whether their imports are CBAM-relevant; 2. Understanding whether they have an obligation to report; 3. Procuring the information on embedded emissions from their non-EU suppliers; 4. Submitting a CBAM report one month after the end of each quarter through the CBAM transitional registry. The failure to report will lead to a process of corrections and possible financial sanctions.

How we can help

With more than 15 years of experience related to all aspects of the EU ETS, the Climate Desk and its partners FutureCamp Climate and LIFE Climate can help your business understand and meet its obligations under the CBAM and find optimal responses to the challenges it brings. Our services note provides an overview of the services we offer in particular.

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