The EU's Mechanism for Carbon Border Adjustment (CBAM) will enter into operation later this year. It affects businesses across specific industries and exporting and importing companies alike. Here is our guide and training offer.
Why do CBAM?
The European Union says it leads international efforts to combat climate change. The key policy, the European Green Deal, outlines a clear path to achieving the EU's ambitious goal of a 55% reduction in carbon emissions relative to 1990 levels by 2030, and to become a climate-neutral continent by 2050.
What is CBAM - in a nutshell?
As part of these efforts, the Carbon Border Adjustment Mechanism (CBAM) is a climate measure that aims to prevent the risk of carbon leakage and support the EU's increased climate mitigation ambitions, all while maintaining WTO compatibility.
Global Solution
The issue of climate change requires global solutions. As the EU increases their climate ambitions and less stringent environmental and climate policies prevail in non-EU countries, there is a significant risk of so-called 'carbon leakage' – i.e., EU companies could move carbon-intensive production abroad to take advantage of lax standards, or EU products could be replaced by carbon-intensive imports.
Such carbon leakage can transfer emissions outside of Europe, undermining EU and global climate efforts significantly. The CBAM aims to ensure that the EU's climate objectives are not jeopardised by production relocation to countries with less stringent policies by equalising the price of carbon between domestic and imported goods.
How does the concept work?
The CBAM system will operate as follows, in accordance with World Trade Organisation (WTO) regulations and other international obligations of the EU:
EU importers will purchase carbon certificates equivalent to the carbon price that would have been paid had the products been produced in accordance with EU carbon pricing regulations.
In contrast, if a non-EU producer can demonstrate that they have already paid a price for the carbon used in the production of the imported products in a third country, the EU importer can deduct the corresponding cost in full.
The CBAM will reduce the risk of carbon leakage by incentivizing producers in non-EU nations to implement environmentally friendly production processes.
Gradual Phase-In
To provide legal certainty and stability to businesses and other nations, the Carbon Border Adjustment Mechanism will be phased in gradually and will initially apply to a limited number of carbon-intensive goods, including iron and steel, cement, fertiliser, aluminium, and electricity generation.
In order to facilitate a seamless rollout and dialogue with third countries, a reporting system will go into effect for these products in 2023, and importers will begin paying a financial adjustment in 2026.
The difference between CBAM and the EU's Emissions Trading System
The Emissions Trading System (ETS) of the EU is the world's first international emissions trading scheme and the EU's primary climate change policy.
It limits the quantity of greenhouse gas emissions that can be emitted by industrial installations in specific sectors. Although allowances must be purchased on the ETS market, a certain number of free allowances are distributed to prevent carbon leakage.
This system has been effective in reducing the risk of leakage, but it reduces the incentive to invest in sustainable domestic and international production.
The CBAM will gradually become a substitute for this. The number of free allowances for all sectors will decrease over time so that the ETS can have the greatest impact in achieving our ambitious climate objectives. In addition, the free allowances for the CBAM sectors will be progressively tapered out beginning in 2026.
As a supplement to the ETS, the CBAM will be founded on a system of certificates that will cover the emissions incorporated in products that are subsequently imported into the EU. The CBAM differs from the ETS in a few limited ways, most notably because it is not a cap-and-trade system. The CBAM certificates instead reflect the ETS price.
To ensure a level playing field between EU and non-EU businesses, and once the full CBAM regime goes into effect in 2026, the system will be adjusted to reflect the revised EU ETS, particularly about the reduction of available free allowances in sectors covered by CBAM.
This means that the CBAM will apply to the covered products only progressively and in direct proportion to the reduction of free allowances allocated to these sectors under the ETS.
Simply put, until they are eliminated in 2035, the CBAM will only apply to the fraction of emissions that do not receive free allowances under the EU ETS, ensuring that importers are treated fairly in comparison to EU producers.
How will the CBAM be implemented?
The CBAM will be similar to the ETS in that importers will be required to purchase certificates. The price of the certificates will be
based on the average weekly auction price of EU ETS allowances,
expressed in euros per tonne of CO2 emitted.
Individual importers or representatives will be required to register with national authorities, where they can also purchase CBAM certificates.
What is the role of national authorities?
National authorities will authorise declarant registration in the CBAM system, as well as review and verification of declarations.
Additionally, they will be accountable for selling CBAM certificates to importers.
What do importers need to do?
To import goods covered by the CBAM into the EU, importers must declare by May 31 each year the quantity of goods and emissions incorporated in those goods imported into the EU in the previous year.
In addition, they must surrender the CBAM certificates they purchased from the authorities in advance.
By requiring importers to pay the same carbon price as domestic producers under the EU ETS, CBAM will ensure that EU-made and imported goods are treated equally and prevent carbon leakage.
What will occur during the transitional period?
In a transitional phase beginning in 2023 and ending at the end of 2025, importers will be required to report emissions embedded in their commodities without paying a financial modification, allowing time for the final system to be implemented.
This transitional phase, coupled with the incremental implementation of CBAM over time, will enable a deliberate, predictable, and proportional transition for EU and non-EU enterprises and authorities.
Once the definitive system becomes completely operational in 2026, EU importers will be required to declare annually the number of goods and the number of embedded emissions in the total goods they imported into the EU the previous year, as well as surrender the corresponding number of CBAM certificates.
Which industries will be covered by the new mechanism, and why were they chosen?
Initially, the CBAM will apply to imports of the following products:
cement
iron and steel
aluminium
fertilisers
electricity
These industries have a high risk of carbon emissions and carbon leakage. The administrative feasibility of including all sectors in the CBAM from the beginning was also considered.
The CBAM will apply to direct greenhouse gas emissions emitted during the production of covered products. By the end of the transition period, the Commission will evaluate the CBAM's effectiveness and determine whether to expand its coverage to include more products and services, including those lower on the value chain, and whether to include so-called 'indirect' emissions (i.e. carbon emissions from the electricity used to produce the good).
How can EU importers ensure they receive the necessary information from non-EU exporters to use the new system correctly?
The information on embedded emissions for products subject to CBAM should be communicated by non-EU producers to importers registered in the EU. In cases where this information is not available when the commodities are being imported, EU importers will be able to use default values to determine the number of certificates they need to purchase (even after the definitive system has been implemented). Importers will be able to exhibit actual emissions during a reconciliation procedure and return the corresponding number of CBAM certificates.
Who will fall under the CBAM's jurisdiction?
The CBAM will encompass imports of products from all non-EU countries in principle. However, the mechanism will exclude certain third countries that participate in the ETS or have an emission trading system linked to the Union. Members of the European Economic Area and Switzerland fall under this category.
CBAM will be applied to electricity generated in and imported from countries wishing to integrate their electricity markets with the EU until such integration is complete.
These nations could then be exempted from the mechanism under strict conditions relating to their fulfilment of particular obligations and commitments.
In that case, the EU will reconsider any exemptions granted in 2030, when these partners should have implemented the decarbonisation measures they have committed to and an emissions trading system comparable to the EU's.
How can I prepare for CBAM?
Check if you are importing any of the products in scope by verifying the HS code in the regulation with your products in your ERP
If in scope, read the EU regulations on CBAM and access specialist guides.
You may purchase our in-depth guide on CBAM in our shop for a low fee. Or you can take out a subscription to our weekly trade intelligence update to be updated thoroughly on CBAM and other initiatives.
Take out a CBAM training - find the dates here.