- Background – Paris Agreement & Fit for 55
The Carbon Border Adjustment Mechanism (CBAM) is a crucial part of the EU’s efforts to achieve climate neutrality by 2050, aligning with the Paris Agreement’s goals. It aims to prevent carbon leakage while encouraging non-EU countries to adopt eco-friendly practices. Endorsed by the European Parliament in March 2021, it seeks WTO compliance and integrates with the EU Emissions Trading System. By adjusting imports based on embedded emissions, it incentivizes global cooperation on climate action. Revenue generated supports both mitigation and adaptation efforts in developing countries, emphasizing international collaboration in tackling climate change.
- About CBAM
The CBAM aligns with EU’s international commitments and WTO rules. It mirrors the EU ETS, taxing embedded emissions in imported goods using a methodology consistent with EU ETS reporting. Initially targeting high-risk sectors like iron/steel, cement, and others, it’s gradually introduced with a reporting system from October 2023, and financial adjustments start in 2026. This approach aims for legal certainty and dialogue with third countries.
- Relevant Sectors
Criteria by which a specific sector falls under the scope of the CBAM include:
- relevance of the sector in terms of the quantity of greenhouse gas emissions;
- exposure of the sector to the risk of carbon leakage;
- need to balance imported products, in terms of greenhouse gas emissions, with domestic products of the EU.
CBAM targets industries like iron, steel, cement, aluminium, hydrogen, and fertilizers due to their high greenhouse gas emissions. Electricity is covered, especially from coal-fired plants. Refinery products and organic-based chemicals are not included currently due to monitoring limitations.
- CBAM Certificate
The CBAM entails – similarly to the system of allowances under the EU ETS – the surrendering of certificates (CBAM certificates) by importers, based on the embedded emission intensity of the products they import in the EU and purchased at a price corresponding to that of the EU ETS allowances at any given point in time. These certificates will not be linked to the EU ETS system of allowances but will mirror the price of these allowances to ensure a coherent approach to the pricing under the EU ETS.
Starting January 1, 2026, importers under CBAM must trade certificates to cover embedded emissions. They must purchase enough emission allowances for their imports annually. Importers failing to obtain sufficient certificates may face penalties. Key requirements include calculating direct and indirect CO2 emissions, verifying actual values, obtaining CBAM certificates, and submitting an annual CBAM declaration by May 31 of the following year, comparing imported emissions with acquired allowances.
- CBAM & EU ETS
The CBAM took effect on October 1, 2023, but will be phased in gradually. Initially, a simplified version of the CBAM will apply with reporting obligations only, the aim being to collect data. Starting in 2026, a levy will be imposed on importers of covered goods (which may have been expanded by that time) tied to the weekly average EU ETS allowance price, which, as of December 1, 2022, traded above 80 EUR. Importers must register with the applicable governmental authority and provide periodic reports on imported goods emissions data. Any covered entity that cannot provide the required emissions data calculated in accordance with applicable requirements will be forced to use default values and be subjected to a higher emissions factor, increasing CBAM obligations. Direct emission reporting must be verified by an EU-accredited third party.
- Functioning of the System
Importers bringing goods into the EU must acquire CBAM certificates, reflecting CO2e emissions equivalent to EU production standards. They submit annual reports detailing imported quantities, verified emissions data, and CBAM certificate numbers, deducting any paid carbon taxes. In cases of inadequate data, importers use typical emission values, either from exporting countries or bottom-tier EU facilities. The transitional phase, started October 1, 2023, requires non-EU producers to submit emissions data, which still does not need to be overseen and verified by national accreditation bodies until January 1, 2026.
- Third Countries and the CBAM
In principle, imports of goods from all non-EU countries are covered by the CBAM. However, certain third countries who participate in the EU ETS or have an emission trading system linked to it are excluded from the CBAM, so that a carbon price is not paid twice for the same product. This is the case for members of the European Economic Area (EEA) and Switzerland.
The CBAM applies to electricity generated in and imported from third countries including those that wish to integrate their electricity markets with the EU. If those electricity markets are fully integrated and provided that certain strict obligations and commitments are implemented, the concerned countries could be exempted from the CBAM.
How Can BD2P Assist?
With our deep expertise spanning various industries and regulatory landscapes, we are poised to support companies in embracing the CBAM. By strategically adopting CBAM, businesses can unlock significant competitive advantages.
Furthermore, we offer comprehensive assistance in fulfilling CBAM reports and provide support for final report submissions. Our team is equipped to address any queries and provide guidance throughout the reporting process, ensuring a seamless transition to compliance with CBAM regulations. We can help you measure, quantify and assess risks and opportunities across supply chains under a wide range of scenarios and understand the impact on business performance.
For more information, please download CBAM – WHAT DID WE LEARN FROM THE PHASE-IN PERIOD document.