As a world leader in fighting climate change, the European Union (EU) believes this global problem demands global solutions. Many non-EU countries hold businesses to a lower standard for climate policies, which leads to carbon leakage. Leakage occurs when EU-based companies move carbon-intensive production to countries with less stringent climate policies or increase imports of carbon-intensive products – often at a lower cost.
That’s why the European Commission introduced the Carbon Border Adjust Mechanism (CBAM) and recommended its inclusion in the “European Green Deal,” which includes other regulations such as the EU Corporate Sustainability Reporting Directive (CSRD). The CBAM incentivizes decarbonization by levying a tax on imported goods for carbon emissions generated during production. An important end goal of the CBAM is to encourage cleaner industrial production in non-EU countries.
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Decarbonizing the economy and industries in the EU
By launching the CBAM regulation, the EU is taking another step toward decarbonization as part of its objective to become climate-neutral by 2050, one of the key targets set by the European Green Deal.
“I welcome the political agreement . . . on the Commission’s proposal for a Carbon Border Adjustment Mechanism. This is a central part of our European Green Deal, preventing the risk of carbon leakage. It is a huge step forward, as we raise our climate ambitions.”
Ursula von der Leyen, President, European Commission
The CBAM will help ensure a level playing field for EU domestic producers by requiring EU importers to pay fees for the carbon emissions associated with goods imported into EU countries. The cost to EU importers will be comparable to what EU domestic producers pay under the EU Emissions Trading System (ETS).
Initially, the CBAM will apply to specific products from some of the most carbon-intensive sectors, including these products from the energy, resources, and industrial (ERI) industry:
- Cement
- Iron and steel
- Aluminum
- Fertilizer
- Electricity
- Hydrogen
Once fully phased in, the CBAM will capture more than 50% of the emissions in ETS-covered sectors.
Track milestones of the multiyear CBAM transitional period
The EU plans to phase in the CBAM over several years to allow EU and non-EU businesses and regulatory bodies to implement the necessary systems and processes to ensure compliance with this new measure. The transitional period starts on October 1, 2023, and ends on January 1, 2026 (current target date), when organizations must start paying the carbon levy.
The multiyear transitional phase is a pilot for all stakeholders: importers, producers, and authorities. It will also allow the EU to collect information on embedded and indirect emissions to help them refine the methodology. During the transitional period, importers will start reporting greenhouse gas emissions (GHG) embedded in their imports (direct emissions) without remitting payments or making adjustments. Since the methodology for tracking indirect emissions for products such as cement and fertilizer has yet to be defined, the EU will not require reporting during the transitional phase.
The permanent system becomes effective on January 1, 2026, when importers will make payments for the imported goods they reported during the transitional phase. After that, importers will report and remit payments annually.
The timing of the gradual introduction of the CBAM aligns with the planned phase-out of the EU Emissions Trading System (ETS) free allowance allocations from 2026-2034, starting with 2.5% in 2026 and eventually reaching 100% in 2034.
Prepare for CBAM reporting and payment
October 1, 2023 is only a few months away, so it’s imperative to start preparing for the CBAM transitional period. Here are a few steps you can take now:
- Conduct an impact assessment to determine whether CBAM applies to the goods (products) your company imports from outside the EU, and if so, calculate the volume.
- Reach out to producers (suppliers and manufacturers) to obtain greenhouse gas emissions data for each import.
- Set up the necessary data collection processes and systems to report and remit payments for embedded emissions in compliance with the CBAM regulations. It will likely require the combined effort of multiple business units, making it necessary to assign responsibility for individual tasks.
- Register your company as an importer with the authorities in your country.
- Purchase CBAM certificates to use as a form of payment. The EU uses the weekly average auction price of EU ETS allowances per €/ton of CO2 emitted to determine the certificate value.
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