These frequently asked questions will help you to understand the carbon border adjustment mechanism, how it will affect your organisation both now and in the coming years and the actions you need to take to prepare.
What do I need to report as an importer of CBAM goods during the transitional period (as of 1 October 2023)?
What is the Carbon Border Adjustment Mechanism (CBAM)?
The Carbon Border Adjustment Mechanism is a carbon pricing system recently introduced by the EU that will impose a fee on a range of carbon-intensive goods imported into the EU.
Under the CBAM regulations, EU importers will need to report the upstream emissions in certain imported goods, and purchase carbon certificates equivalent to the carbon price that they would have paid if the imported goods had been produced under the EU's Emission Trading System (ETS).
If a non-EU producer can demonstrate that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be deducted from the CBAM payment obligation of the EU importer.
As the EU strives to increase its efforts to address climate change, and whilst less stringent climate regulations persist in non-EU countries, there is a potential for ‘carbon leakage’. Carbon leakage happens when producers in the EU relocate their carbon-intensive production activities to countries which have less stringent climate policies, or when products previously produced in the EU get replaced by equivalent carbon-intensive imports.
The CBAM is being introduced to achieve carbon cost parity between imported and locally produced goods and to maintain competitiveness between the EU and trade partners. The overarching aim is to reduce carbon emissions inside and outside the EU.
The objectives of the CBAM are:
- To replace for free allocation within the EU Emissions Trading Scheme (ETS)
- To promote equal opportunities between the EU and its trading partners
- To prevent carbon leakage by discouraging companies from relocating to countries with weaker environmental regulations
- To protect EU companies that have invested in green technologies
- To encourage increased climate ambition in other countries
- To promote the implementation of carbon market policies in non-EU countries (to keep revenues within producer countries)
- To generate revenue that could be used to support climate policies in EU or other countries
CBAM will likely affect most sectors and markets in a myriad of ways depending on the response by governments, producers and consumers, both inside and outside the EU. Organisations will need to carefully consider their response - with CBAM impacts ranging from changes in costs to the need for developing and deploying new monitoring and reporting systems across the supply chain. Stakeholders most affected by CBAM in the medium term include:
- EU Importers: Companies within the EU that import CBAM-covered goods into the EU. EU importers will be required to report the upstream emissions for the relevant imported goods, and purchase carbon certificates equivalent to the carbon price that they would have paid if the imported goods had been produced under the EU's ETS.
- Non-EU Operators: Producers (“operators”) outside of the EU that produce CBAM-covered goods and sell them to the EU. Non-EU operators are responsible for monitoring and reporting the embedded emissions of the goods which have produced and will export to the EU.
- EU Consumers: Companies within the EU that don’t import CBAM-covered goods themselves but utilise those goods as product or process inputs in their operation. Although these organisations won’t be affected by carbon monitoring or reporting requirements, the carbon fee imposed on imported goods may lead to an increase in the cost of their input material.
How is the CBAM different to the EU Emissions Trading Scheme (ETS)?
The ETS, established in 2005, sets an annual cap on greenhouse gas (GHG) emissions for companies in certain sectors. This cap gradually decreases over time to reduce carbon emissions and encourage decarbonisation initiatives. In-scope companies either receive free emission allowances or buy them up to the cap limit. Any unused allowances can be sold or used in the subsequent year. The cap is gradually reduced over time to ensure emission reductions.
CBAM is a supplementary measure to the ETS, imposing charges on the embedded carbon of in-scope imports. The CBAM charge is equal to the charge imposed on non-imported goods under the ETS although adjustments may be made according to any mandatory carbon prices in the originating (non-EU) country.
In effect, CBAM ensures the same carbon price is paid for imports (via CBAM) as for equivalent products originating from within the EU (via ETS).
CBAM obligations will be gradually phased in for EU importers as ETS free allowances are gradually phased out for EU producers, with the goal of driving down overall carbon emissions.
What sectors are covered in the scope of CBAM?
CBAM applies to EU imports of iron, steel, aluminium, electricity, certain fertilisers, cement and hydrogen, as well as certain precursors (i.e. cathode active materials) and a limited number of simple downstream products such as screws and bolts. The European Parliament have signalled that they aim to expand the scope to include plastics and chemicals by 2026 and to all sectors covered by the EU ETS by 2030.
What is the timeline for CBAM?
Phase 1: Transitional Period, October 2023
CBAM reporting obligations take effect but are restricted to reporting and focused on a limited amount of goods.
This phase is intended to allow operators, importers, EU member states and the European Commission to develop and refine necessary processes.
Phase 2: Definitive Period , January 2026
CBAM payment obligations begin to be phased-in at the same pace that EU ETS free allowances in sectors covered by the CBAM are phased-out.
The EU will review other goods to be added to the CBAM
Phase 3, 2030 – 2034
CBAM will be extended, and new products will be gradually added to the CBAM scope.
Phase 4, 2034 onwards
Final goods and materials imported to the EU will be taxed under CBAM.
ETS allowances are fully phased out.
Operators report to importers, while importers report to relevant national authorities, who in turn report to the European Commission.
Importers are the central stakeholders responsible for collecting the relevant carbon emissions information, ensuring its accuracy, and reporting it to the relevant competent authority within the EU Member State where goods pass through EU customs. Reporting will be done by a reporting declarant, which could be the importer themselves or one appointed by the importer. While upstream operators, suppliers and producers located outside the EU have the responsibility to provide carbon-related data to EU importers, it remains the responsibility of importers to ensure they receive this data from their suppliers.
All reporting will be done through a central registry that all stakeholders will have access to, and which is planned to integrate with existing EU customs systems.
What do I need to report as an importer of CBAM goods during the transitional period (as of 1 October 2023)?
During the transitional period, importers are required to submit quarterly reports. These will include:
- The total quantity of each type of goods (in MWh for electricity and in tonnes for other goods), specified per installation producing the goods in the country of origin.
- The total embedded emissions (in tonnes of CO2e emissions per tonne of each type of good).
- The total indirect emissions, including the amount of electricity consumed and the applicable emissions factor
- Information about (if applicable) the carbon price due in a country of origin for the embedded emissions in the imported goods.
Installation operators are responsible for monitoring and reporting to the importer the total embedded emissions, total indirect emissions and information about relevant carbon prices in the country of origin. Having this capability will make operators like producers and suppliers significantly more attractive to EU importers.
As an importer, how do I calculate my emissions data for CBAM with primary or default values?
When reporting embedded emissions, actual emissions data or default values can be used.
Using primary (actual) data
The operator of the production facility provides this data. The ideal scenario is the creation of a central database for operators in third countries to provide importers with verified emissions data to facilitate reporting.
The operator can use one of the following two options:
- The “calculation-based” approach uses the quantities of all fuels and relevant materials consumer, and corresponding “calculation factors” to estimate emissions. Particularly relevant is the “emission factor” which is based on the carbon content of a fuel or material.
- The “measurement-based” approach requires the operator to measure the concentration of the greenhouse gases and the flow of the flue gas for each emission source.
As long as they result in similar emissions coverage and accuracy, the operator can use alternative methods during the introductory phase of the transitional period (until 31 July 2024) if they are approved for emissions monitoring in their jurisdiction.
Using default value data
These alternative methods include using the default values which are published by the European Commission.
These default values reflect average emissions intensities of each exporting country and for each good - with a mark-up to ensure environmental integrity. The size of this mark-up will be informed by the data collected during the transitional period. Where reliable average data isn’t available, the Commission will use the average emissions intensity of the 10% worst performing EU ETS installations for that type of good.
Note that default values may be higher than actual emissions, and importers will have to pay that price. There are therefore substantial potential gains to applying rigorous strategy and carbon accounting to evidence lower supply chain emissions.
What information do operators (non-EU producers) need to monitor?
- Total direct emissions of the installation, appropriately attributed to individual products.
- Quantities of specific input materials which themselves have embedded emissions (the “precursors”) used in the manufacturing process and the embedded emissions of these precursor materials.
- Indirect emissions from the generation of electricity consumed during production, attributed to the goods produced. Emissions embedded in precursor goods must again be included, where relevant.
- Relevant carbon prices which are due to produce the good within its own jurisdiction, if relevant.
Having systems in place to report this information to customers will make operators like producers and suppliers significantly more attractive to EU importers.
Are there any exemptions from CBAM?
- Electricity markets integrated with EU internal markets through market coupling.
- Goods imported from places that have implemented comparable carbon pricing systems - or are linked to EU ETS i.e. the countries of Iceland, Liechtenstein, Norway, Switzerland and territories of Büsingen, Heligoland, Livigno, Ceuta and Melilla.
Are there similar or aligned regulations in other parts of the world?
It is expected that other jurisdictions will follow the EU’s example on carbon border taxation.
The US is developing a Clean Competition Act (CCA) which includes 25 sectors so a wider scope than the CBAM. Tariffs would be payable on the difference between the actual emissions and US baseline emissions.
What’s likely to happen next with CBAM?
Over time, CBAM will expand to cover more goods and more complex products. As other jurisdictions adopt similar schemes there will be adjustments to accommodate carbon prices that have already been paid in the country of production.
What advantages can CBAM bring to my organisation?
For operators, having efficient CBAM monitoring and reporting capability can serve as a competitive advantage to set your organisation apart from competitors that don’t offer similar capability or do so at a higher cost. Installation operators also have the potential to increase the competitiveness of their goods if they can evidence emissions that are lower than their competitors through methods such as life cycle assessment. Forward-looking organisations are already taking action in order to reap the benefits sooner.
For importers, CBAM offers the opportunity to reconsider their supplier relations and reconfigure their supply chains to minimise carbon emissions and therefore costs. The financial pressure CBAM puts on organisations importing carbon intensive goods into the EU can be used as incentive to address your wider sustainability credentials and increase business and supply chain resilience. With investors and consumers growing more eco-conscious as well as ever-increasing regulatory pressure, organisations must take action to remain competitive, attract investment and stay compliant.
What is the best approach to mitigate the impacts of CBAM?
The impacts and practicalities of CBAM are complex. As such, it is critical to seek expert advice to fully understand what is in scope for you, how to comply and the ongoing impact on your organisation. To reduce the ongoing impacts, you will need a robust strategy, informed by a supply chain risk mapping, cost-benefit analysis, scenario modelling and enhanced sustainable procurement practices, implemented through optimising your supply chain and enhancing your production processes.