EU Passes Carbon Border Adjustment Mechanism Regulation

CBAM will increase the costs of carbon-intensive goods imported into the EU.

The EU’s 2023/956 Regulation, which creates a Carbon Border Adjustment Mechanism (CBAM), was published in the official journal on May 10, 2023

Imports of carbon-intensive items are subject to a carbon fee under the CBAM because of the embedded emissions in those goods. This fee will be gradually phased in until it eventually equals the fees paid by the producer in the EU under the EU Emissions Trading System (EU ETS), creating a carbon pricing that is comparable for both domestic and import goods. 

Scope

The CBAM will initially cover six groups of products, which are listed in Annex I with corresponding Combined Nomenclature (CN) code. They include,

• Cement 
• Electricity 
• Fertilizers 
• Iron and Steel 
• Aluminum and Hydrogen

In addition, the regulation will also apply to products processed from those goods resulting from the inward processing procedures.

Before 2026, the EU will assess and consider the possibility of extending the scope of CBAM to other goods at risk of carbon leakage, specifically organic chemicals and polymers. The ultimate goal is to cover all goods within the scope of EU ETS by 2030. 

Obligation 

Transitional period (2023.10.1 – 2025.12.31)

During the transitional period, each importer of covered goods or its customs representative should submit a quarterly CBAM report to the Commission. The report should include: 

• The total quantity of each type of covered goods
• The actual total embedded emissions and total indirect emissions
• The carbon price due in a country of origin for the embedded emissions in the imported goods, taking into account any rebate or other form of compensation available.

Implementation stage (2026.1.1 onward) 

From January 1, 2026, only an authorized CBAM declarant can import covered goods into the EU. The declarant shall:

1. Submit CBAM declaration by May 31 of each year through the CBAM registry. The declaration shall contain the following information:

• The total quantity of each type of goods imported during the preceding calendar year
• The total embedded emissions
• The total number of CBAM certificates to be surrendered
• A copy of verification reports issued by accredited verifiers

2. Purchase CBAM certificates from the authorities of its member state on a common central platform. The price of CBAM certificates shall be calculated as the weekly average prices of EU ETS allowances. The declarant shall ensure the number of CBAM certificates on its account in the CBAM registry at the end of each quarter corresponds to at least 80 % of the embedded emissions, in all goods it has imported since the beginning of the calendar year.

3. Surrender CBAM certificates by May 31 of each year through the CBAM registry. The number of certificates shall correspond to the embedded emission declared and verified for the previous calendar year. 

What Next,

The CBAM reporting requirements will apply as of October 1, 2023. In this regard, companies should carefully assess the necessity of tracking emissions, gathering pertinent data, and keeping an eye on domestic carbon costs and charges. Importers located outside the European Union (EU) will also be required to designate an indirect customs representative.

In the long run, as CBAM will become more stringent in terms of the coverage of products, companies may need to readjust their business structure to further reduce emissions and decarbonise their production processes.