European Union Carbon Border Adjustment Mechanism (CBAM)

What is CBAM?

CBAM is a European Union compensation system to fairly price goods that are CO²-intensive in their production and thus encourage clean industrial production in third countries. Regulation (EU) 2023/956, which came into force on 17 May 2023, establishes this system. It goes back to a Commission draft of 14/07/2021.

What are the reasons for CBAM?

The European Union is trying to counteract the global problem of climate change through the Carbon Border Adjustment Mechanism (CBAM) by fairly pricing CO^2-emissions from the production of CO²-intensive goods entering the EU and promoting less climate-damaging industrial production in non-EU countries. This is intended to reduce the risk of carbon leakage. Carbon leakage occurs when companies based in the EU produce CO²-intensively in countries with less stringent climate protection measures than in the EU or import from countries with less stringent climate protection regulations. The CO² border adjustment system is intended to ensure that the CO² price of imported goods corresponds to the CO² price of domestic products, thus ensuring that the EU's climate targets are not undermined and that domestic manufacturers are not placed at a competitive disadvantage.

When does CBAM apply from?

A transitional phase of CBAM will extend from 2023 to 2025. CBAM will apply in its final form from 2026.

• 2023-2025: CBAM transition phase

This phase is intended to serve as a pilot and learning phase for all those affected (importers, manufacturers and authorities). During the transition period from 1^st October 2023 to 31^st December 2025, the CBAM is limited exclusively to reporting obligations. Importers or indirect customs representatives who import CBAM goods into the EU are obliged to calculate and report the greenhouse gas emissions (grey emissions) generated during the production of CBAM goods and their precursors. Certificates do not yet have to be purchased or surrendered.

The CBAM is being implemented in stages. Imports of certain goods and resources that are CO²-intensive in production and therefore harbour the greatest risk of carbon leakage will be affected first. By the end of 2024 at the latest, the EU Commission will identify further products along the value chain of CBAM goods. So far, CBAM affects the following sectors, which account for around 50% of emissions in the EU-ETS:

- Aluminium

- Cement

- Electricity

- Fertilisers

- Hydrogen

- Iron

- Steel

• 2026: Final CBAM regulation

EU importers of goods affected by CBAM will register with national authorities, from which they will then also acquire CBAM certificates. Manufacturers in third countries are neither obliged to register nor to purchase CBAM certificates; this only applies to importers based in one of the EU member states. The price of CBAM certificates is linked to the price of emissions certificates in the EU Emissions Trading System (EU-ETS). Each CO² price that is already due in the countries of origin reduces the number of CBAM certificates to be surrendered. This mechanism equalises the CO² price for foreign and domestic goods sold on the EU market.

What are the reporting obligations and methodology?

CBAM filers must submit quarterly CBAM reports instead of annual CBAM declarations. The first report covering grey emissions from the fourth quarter of 2023 had to be submitted by 31.1.2024. There is flexibility in the calculation and reporting for the duration of the transition phase. In addition to the EU method, two other methods are available for the transition phase.

• Full reporting according to the new method (EU method)
• Reporting based on an equivalent method using data from national CO² pricing or monitoring systems (until December 2024).

From 1^st January 2025, only the EU method will be valid.

During the transition phase, companies must report on both direct and indirect emissions. Penalties can be imposed if the notifier does not submit a correct or complete CBAM report. The penalties range from EUR 10 to EUR 50 per tonne of unreported emissions.

 

Autor: Senem Kathrin Güçlüer