Client Alert: EU’s Carbon Border Adjustment Mechanism (CBAM)

Carbon Border Adjustment Mechanism

Effective October 1, 2023, the transitional phase for the Carbon Border Adjustment Mechanism (CBAM) is now underway. Notably, the initial reporting deadline for importers is set for January 31, 2024. This is a significant milestone for firms importing certain products into the EU.

CBAM is a new mechanism under the EU Green Deal framework. It mandates that EU importers pay an adjustment for emissions generated during the production of specific carbon-intensive items in non-EU countries. This adjustment aims to ensure that goods imported into the EU are subject to carbon pricing that is similar to what domestic EU industries face under the EU Emissions Trading System.

It covers a number of specific products in some of the most carbon-intensive sectors listed under Annex I of the Regulation (EU) 2023/955, such as iron, steel, cement, fertilisers, aluminium, electricity and hydrogen.

CBAM requires both importers based in the EU and exporters outside the EU to account for the carbon emissions associated with the production of those goods.

To achieve CBAM compliance, importers typically need to:

  1. register as an authorised declarant to be eligible for the quarterly CBAM reports;
  2. purchase CBAM certificates or emission allowances; and
  3. prepare and submit regular reports detailing the emissions associated with their imported goods to the relevant EU authorities.

Exporters, on the other hand, need to:

  1. implement carbon accounting to determine the carbon emissions associated with their production processes based on specific methodologies;
  2. independently verify embedded emissions; and
  3. explore ways to reduce the carbon footprint of their products to minimize CBAM-related costs.

From 1 October 2023, businesses importing products within the CBAM scope must adhere to a quarterly reporting mechanism. The transitional phase runs from 1 October 2023 until 31 December 2025, during which only reporting obligations, without other obligations (such as buying certificates), will apply. This report will require a comprehensive array of data, including product master data, transactional details, and supplier information.

Within this framework, importers are obliged to report various details, including the type of goods as identified by their CN code, the quantity of imported goods, the direct and indirect emissions embedded in them, the country where a carbon price is due, the country of origin of imported goods, the identity and location of the installations where the goods were produced and other information as defined in the implementing regulation.

The report is to be submitted to the CBAM Transitional Registry, overseen by the European Commission. This electronic database features a trader portal for the submission of quarterly CBAM reports and it is accessible to both local competent authorities and the Commission. Non-compliance with CBAM reporting obligation or inaccuracies in the CBAM reports incur penalties, established by each EU Member State, ranging between EUR 10 and EUR 50 per ton of unreported or misreported embedded emissions. The penalty shall increase in accordance with the European index of consumer prices.