On October 1 this year, the Carbon Border Adjustment Mechanism (EU CBAM) regulation will start applying, introducing the world’s first carbon border tax.
The CBAM monitoring obligation begins on October 1, and the first detailed CBAM report is due in January 2024. The report includes data on embedded CO2 emissions in imported products.
CBAM affects manufacturers and exporters to the EU and, for now, includes iron, steel, aluminum, cement, artificial fertilizers, electricity, and hydrogen.
CBAM is a fundamental shift in the international trade regime with the EU, potentially affecting costs, margins, and the competitiveness of imported products in the EU market.
Businesses should get informed, prepare, and adapt to the new conditions, especially in preparing data for the first quarterly period beginning October 1.
What is CBAM and Why is it Important?
On October 1, 2023, the European Union will apply a new regulation to introduce the world’s first carbon import duty, the Carbon Border Adjustment Mechanism (CBAM). This is a critical part of the overall strategy to address climate change, embodied in the “Fit for 55” package, which aims for Europe to become a climate-neutral continent by 2050.
With CBAM, the EU aims to level the playing field, ensuring European companies, which already pay a carbon dioxide emission price through the EU Emissions Trading System (ETS), compete fairly with products from countries with minimal or no such charges. This is also intended to address the problem of “carbon leakage,” the effect of relocating production from the EU to countries with less stringent climate regulations to avoid paying for CO2 emissions.
While CBAM is a significant step in the EU`s climate policy, its effects transcend environmental considerations, as it is likely to have considerable implications for international trade and operational dynamics in various sectors. The European Union is leveraging the “Brussels Effect,” banking on CBAM becoming a golden standard in this domain, akin to how GDPR influenced global data protection standards. This ensures that companies outside the EU align with its laws, creating a domino effect globally.
Initially, CBAM will include carbon-intensive manufacturing sectors, including iron and steel, aluminum, cement, fertilizer, electricity, and hydrogen. This list will likely expand to cover all products included in the EU ETS. It may encompass glass, paper, mineral oils, plastics, and organic chemicals in the coming several years.
For non-EU manufacturers and importers, especially those from the Western Balkans, the introduction of CBAM presents many challenges and opportunities. As the EU accounts for a significant part of total exports and due to the structure of the manufacturing sector, our region is particularly exposed. Companies exporting affected products to the EU must now be agile, informed, and future-oriented.
What does CBAM entail?
The CBAM regulation was adopted on April 18, 2023, and the Implementation Regulation, which clarifies the application method, was published on August 17, 2023. This sets the groundwork for the CBAM transitional phase, starting October 1, 2023.
During this period, EU importers must report quarterly on carbon dioxide emissions for the specified product categories, but a financial levy will not apply. The first CBAM reports should be submitted by January 31, 2024. This transitional phase allows companies and other stakeholders time to prepare comprehensively for the full introduction of CBAM, starting in January 2026.
How does CBAM affect non-EU producers and EU importers?
Calculating CO2 emissions in production is complex, and the monitoring obligation falls on non-EU producers. While certain standard values will bridge missing data, their use will be limited. The CBAM regulation requires reliable emissions data throughout the supply chain, posing a significant challenge for businesses globally. Though no financial burdens will be incurred during the transitional phase, EU importers failing to report or falsely reporting will face penalties ranging from 10 to 50 euros per ton of unreported CO2 emissions.
From January 2026, the full implementation of CBAM begins, initiating the obligation to purchase and surrender CBAM certificates corresponding to the declared embedded emissions. If certain conditions aren`t met, this financial burden will affect product profitability and competitiveness in the EU market.
What Should Be Done?
Understanding CBAM and its business implications is crucial for all non-EU companies aiming for compatibility with the EU market. The regulation represents a drive for global sustainability and new market dynamics. CBAM hopes to encourage other countries and regions to establish their own emissions trading systems. Recent announcements from countries like Türkiye and Indonesia about introducing an emissions pricing system confirm this assumption.
Companies need to prepare rapidly, first by comprehensively studying the financial and other implications of CBAM for their operations. It`s essential to analyze data needs thoroughly, especially regarding measuring actual CO2 emissions in production, determining where gaps exist, and establishing internal data collection and monitoring processes. Closely following EU guidelines and potential rule adjustments during the transitional phase is crucial. From October 1, importers must report regularly and correctly, ensuring the reports submitted are accurate and in line with the CBAM Implementation Regulation.
In this transformative period, expertise on CBAM, its intricacies, and potential opportunities will be essential for successful adaptation and growth. With the appropriate adjustments and strategic orientation, companies can mitigate risks and tap into the benefits of this global shift toward sustainability.
Author: Bogdan Gecic, founder and partner, Gecic Law