by: David Prieto & Susana Abraham | January 23, 2024
Introduction to the EU CBAM
The introduction of the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) is evidence of the increasing complexity of climate regulation worldwide. Companies must navigate regional or national climate regulations and their cross-border implications to advance low-carbon business models and enhance competitiveness.
CBAM is a carbon pricing mechanism designed to prevent carbon leakage. Carbon leakage refers to the shift of production to other countries with less stringent climate regulations, which leads to a net increase in greenhouse gas (GHG) emissions. In a CBAM, imports of specific products, such as steel, are tariffed with a carbon price associated with the carbon program that the product is subject to.
Overview
How Did It Come About?
The CBAM is part of the regulatory framework developed to advance the European Commission’s ambitious goal of reducing net greenhouse gas emissions by at least 55% by 2030 and becoming a climate-neutral continent by 2050. [1]
Which Sectors Does It Apply To?
The transitional period of EU CBAM covers six emissions-intensive and trade-exposed sectors. These hard-to-abate sectors are most susceptible to the competitive disadvantages that emerge from operating under a carbon pricing system, such as the EU Emissions Trading System (ETS). To prevent carbon leakage, adequate protection is required to balance emissions reductions from industry and reduce the program’s economic stress.
The scope of product types covered by CBAM is expected to expand upon the transitional period’s completion. The implementation of the full coverage of all EU Emissions Trading System products is expected in 2030, expanding to all sectors outlined under the scope of the ETS, such as ceramics, pulp, paper, glass, and bulk organic chemicals.
Implications
What Does the Transitional Period Require of Importers?
Businesses importing eligible product types into the EU market are expected to submit quarterly CBAM reports during the transitional period. The quarterly reports must cover the following:
- Information on the imported goods, including total quantity and type of goods according to the EU Combined Nomenclature Code. [2]
- Embedded direct (and indirect) emissions, expressed in tonnes of CO2 equivalent emissions per tonne of each type of goods.
- Any carbon price incurred or due in the country of origin for the direct emissions.
Flexible measures have been included in the implementation guidelines during the transitional period to support the learning for both manufacturers and regulators. These measures include:
- Reporting of Embedded Direct and Indirect Emissions: Reporting declarants will have the flexibility of calculating and reporting direct emissions, either by the EU methodology, equivalent national systems (up until December 31, 2024), or based on another method such as default values (up until July 31, 2024). [3]
- Default and Estimated Values: As noted above, reporting declarants can use reference values published by the EU Commission. Estimated values from non-EU operators may be used to calculate up to 20% of the total direct emissions for complex goods. [4] An explanation of why actual values cannot be obtained is required to use default or estimated values.
How Will CBAM Operate After the Transitional Period?
During the transitional period, importers must report their embedded carbon emissions associated with the number of goods they import into the EU. These embedded emissions refer to direct emissions generated during the production process (Scope 1) and indirect emissions resulting from the emissions included in the price of electricity purchased for the manufacturing process (Scope 2). [5]
Following this period, the amount of embedded carbon emissions must be compensated for by purchasing and surrendering CBAM certificates at the corresponding weekly average auction price of EU ETS allowances. An annual CBAM declaration submission will also be required. Carbon cost paid at origin can be deducted from the payable CBAM charges if evidence of the cost can be provided.
A key consideration in the EU’s approach to CBAM is that their program is designed to run parallel with their ETS from 2026 to 2034. During this period, ETS participants will experience increased stringency from the phase-out of free allowances. [6] With the gradual phase-out of the free allowances in the EU, there is an expectation of a further increase in carbon price in the EU ETS, which will directly affect the price of CBAM certificates.
Next Steps
For manufacturers operating outside the EU, it is essential that accurate calculation and reporting of emissions that are embedded in products be carried out. EU importers will require this information to submit the quarterly CBAM reports starting January 1st, 2024.
How Can I Get Started?
Navigating the complexities of EU CBAM and ensuring that you are well-equipped may seem daunting. The preceding steps can help companies be better positioned.
ClimeCo is well-versed in supporting clients with understanding and complying with regulatory requirements, GHG inventories, and abatement planning. Please contact us to learn more about how our team of experts can help find the right sustainability solution for your company.
[1] Council of the European Union: European Green Deal
[2] Official Journal of the European Communities: Council Regulation (EEC) No 2658/87Annex I
[3] Official Journal of the European Union: Implementing Regulation (EU) 2023/1773
[4] Official Journal of the European Union: Implementing Regulation (EU) 2023/1773
[5] European Commission: Guidance Document on CBAM Implementation for Importers of Goods into the EU
[6] European Commission: Our Ambition for 2030
About the Authors
David Prieto serves as VP, Sustainability, Policy & Advisory at ClimeCo. He advices clients navigating the risks and opportunities associated with energy transition. David holds a Master of Science from Columbia University and a Bachelor of Arts from the University of London.
Susana Abraham is a Policy Analyst at ClimeCo, advising clients subject to greenhouse gas emissions regulation. Susana holds a Master’s of Global Business from the University of Victoria.
