On August 17, 2023, the EU Commission adopted rules governing the implementation of Carbon Border Adjustment Mechanism (CBAM).
This mechanism, which came into force in May 2023, aims to align carbon pricing for imports and domestic products, focusing on certain carbon-intensive industries.
While carbon pricing under CBAM will commence on January 1, 2026, a transitional phase is set from October 1, 2023, to December 31, 2025, during which only reporting obligations will be enforced.
What is CBAM?
The CBAM is part of the EU's Fit for 55 package, targeting a 55% reduction in greenhouse gas emissions by 2030.
As an environmental policy measure, CBAM complements and reinforces the existing carbon pricing mechanism in the EU established in 2005 with the EU Emissions Trading System (ETS) Directive, by reflecting its effects on imports. The CBAM will help reduce the risk of carbon leakage while encouraging producers in non-EU countries to green their production processes and countries to introduce carbon pricing measures.
More specifically, CBAM targets energy-intensive companies exporting specific goods to the EU. It focuses on imports from non-EEA (European Economic Area) countries and Switzerland in carbon-intensive sectors and will initially apply to imports of the following goods:
Iron and Steel
During the transitional phase, reporting obligations require importers to report embedded emissions in covered products, including information on including the type of goods, quantities, direct and indirect emissions, carbon prices paid abroad, the country of origin and production-related information.
Reports must be submitted to the CBAM Transitional Registry, managed by the Commission. This electronic database will be accessible to local authorities and the Commission. Amendments to reports are allowed until two months after each reporting quarter.
Penalties for non-compliance, incorrect or incomplete filing of a CBAM report will vary by Member State but must fall between €10 and €50 per tonne of unreported embedded emissions.
What carbon accounting methods are required for CBAM?
As from the entry into force of the final regime of CBAM in 2026, EU importers will buy CBAM certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules.
If a non-EU producer has already paid a carbon price in a third country on the embedded emissions for the production of the imported goods, the corresponding cost can be fully deducted from the CBAM obligation.
For covered products in the cement, fertilisers, and electricity sectors, both direct and indirect emissions must be priced, while for covered products in the iron, steel, aluminium, and hydrogen sectors, only direct emissions must be priced.
Complex rules dictate the calculation methods for embedded emissions, depending on the production process. Until 2025, flexibility in monitoring methodologies is allowed, but starting in 2026, only approved “EU Methods” can be used:
The calculation-based approach: This means determining emissions from source streams based on activity data obtained through measurement systems and additional parameters.
The measurement-based approach: This means determining emissions from sources through continuous measurement of the concentration of the relevant greenhouse gas in the flue gas and the flue-gas flow.
Organisations are allowed to utilise "default values" (to be published by the Commission) for input materials or subprocesses contributing to less than 20% of the total emissions of complex goods.
How can you prepare for CBAM?
Gain an understanding of CBAM obligations that affect your business and assess the impact on your supply chain. Which of your products are covered by CBAM? What emissions reporting requirements apply to each kind of product?
Set up a robust carbon accounting system, to ensure that you are collecting the data required across the value chain, and a compliant reporting process that conforms with CBAM. If you already are collecting ESG data, check whether it can be repurposed or leveraged for CBAM reporting purposes.
Consider your procurement terms and determine which suppliers may need to be engaged to provide necessary information. What data do you need from existing suppliers? How can supplier contracts be amended to acquire newly needed information?
Monitor regulatory developments and ensure your business can be prepared for and adapt to changing circumstances.
The CBAM reporting requirements represent a significant undertaking for businesses involved in covered sectors. Seeking expert guidance may be necessary to navigate this complex regulatory landscape.
Reach out to our team if you need any support with your carbon accounting - we specialise in carbon management across complex supply chains and are here to help you decarbonise with confidence.