As of 1 October 2023, the Carbon Border Adjustment Mechanism (“CBAM”) established under Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 will apply to imports of certain goods such as cement, electricity, fertilisers, iron and steel, aluminium, hydrogen and processed products from those goods into the customs territory of the European Union. During a transitional period from 1 October 2023 to 31 December 2025, EU importers will have to comply with reporting obligations for such imported goods or face severe penalties.
The EU has launched the CBAM as part of the European Green Deal to act as a counterpart to the existing European Emissions Trading System (“EU ETS”). Its aim is to prevent carbon leakage – i.e. the shift of greenhouse gas emissions to non-EU countries – paving the way for a climate-neutral future. To achieve this goal, importers of goods from energy-intensive sectors are to pay the same carbon price as domestic producers under the EU ETS. The relevant mechanisms will be progressively phased in. Initial reporting obligations will apply for a transitional period that starts on 1 October 2023 and extends through 2025. Once the permanent system enters into force on 1 January 2026, importers will need to be authorised as a CBAM declarant to import goods covered into the customs territory of the European Union.
I. Background
Introduced in 2005, the EU ETS has been a key climate policy tool aimed at reducing greenhouse gas emissions in the European Union by incentivising companies to burn less fossil fuels. The EU ETS is a “cap and trade” scheme: The overall volume of greenhouse gases that can be emitted by stationary installations such as power plants and industrial plants in the European Union is subject to a cap (or limit) set by the European Commission, which corresponds to the sum of emission allowances. To achieve the EU’s goal of net-zero emissions by 2050 this cap is gradually reduced each year. Companies must acquire allowances for each tonne of carbon they emit either by purchasing them on the carbon market or through EU ETS auctions. They can also trade emission allowances they do not need.
When it was introduced, the EU ETS already posed the risk of “carbon leakage”, a practice where companies move carbon-intensive production abroad to circumvent strict European emission standards and avoid having to acquire the necessary allowances. Today, carbon leakage is addressed by allocating free certificates to producers in energy-intensive sectors. However, to achieve climate targets, this system of free certificates will be gradually phased out until it is completely discontinued in 2034. In order to prevent producers from circumventing the EU ETS by shifting production – and as a result greenhouse gases – to non-EU countries, the CBAM is designed to combat not only carbon leakage but also reduce global carbon emissions (Article 1(1) CBAM Regulation). Companies must therefore pay the same carbon price for the emissions of certain imported goods as they would under the EU ETS. This is ultimately intended to level the playing field for European companies.
II. Which sectors does this affect?
The CBAM applies to imports of goods such as cement, electricity, fertilisers, iron and steel, aluminium, hydrogen and processed products of those goods into the customs territory of the European Union (Article 2(1) CBAM Regulation). The exhaustive list of goods covered is contained in Annex I, no. 1 CBAM Regulation, categorised by combined nomenclature codes (“CN codes”) (Annex I, no. 1 CBAM Regulation). This standardised EU-wide tool for classifying goods is designed to meet the requirements the Common Customs Tariff. Goods whose eight-digit CN codes are not listed in Annex I are excluded. All importers of the goods are affected. Those from developing countries, in particular, are not subject to exemptions or price reductions (cf. Article 30(2), letter (f) CBAM Regulation). The only exceptions apply to consignments not exceeding a value of EUR 150, for goods with a value of up to EUR 150 contained in the personal luggage of travellers coming from a third country, and for goods to be moved or used in the context of military activities (Article 2(3) CBAM Regulation).
III. When does the CBAM take effect?
The obligations under the CBAM will be introduced step by step as from 1 October 2023 (Article 32 CBAM Regulation). Importers are initially only required to prepare a report every quarter (Article 35(1) CBAM Regulation), which, according to the Commission Implementing Regulation (EU) 2023/1773 of 17 August 2023 (“Implementing Regulation”), must contain the following information:
- The total quantity of each type of goods, expressed in megawatt hours for electricity and in tonnes for other goods, specified for each installation producing the goods in the country of origin (Article 35(2), letter (a) of the Regulation) and – for identification purposes – the CN code of the goods pursuant to Article 3(1), letter (b) Regulation (EEC) 2658/87 (Implementing Regulation; Annex I CBAM Regulation);
- The actual total embedded emissions in tonnes of CO2e emissions per megawatt hour of electricity or, for other goods, in tonnes of CO2e emissions per tonne of each type of goods (Article 35(2), letter (b) CBAM Regulation), specifying the country of origin of the imported goods, the installation in which they were produced, the production routes used, for steel products the identification number of the steel mill and the specific direct emissions of the goods, which are to be determined by converting the attributed embedded direct emissions of the production processes into emissions specific of the goods expressed as CO2e per tonne (Article 3(2) Implementing Regulation);
- The total indirect emissions (Article 35(2), letter (c) CBAM Regulation), specifying the electricity consumption, whether actual emissions or default values are reported, the relevant emission factor, the amount of specific indirect emissions determined by converting the attributed embedded indirect emissions in the goods into CO2e emissions per tonne (Article 3(3) Implementing Regulation);
- 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 (Article 35(2), letter (d) CBAM Regulation).
The reporting obligation only applies during the transitional period, which expires on 31 December 2025. For each quarter from 1 October 2023 until 31 December 2025, the CBAM reports must be submitted to the CBAM transitional registry – specifically established to this purpose – no later than one month after the end of that quarter (Article 8(1), Article 10 Implementing Regulation). As of 31 December 2024, companies can apply for the status of authorised CBAM declarant (Article 5(1) CBAM Regulation). Upon authorisation, the CBAM declarant will be granted access to its account in the CBAM registry (Article 16(2) CBAM Regulation). In addition, operators of an installation in a third country may apply for registration (Article 10(1) CBAM Regulation). During the transitional period, CBAM certificates do not have to be surrendered until the end of 2025. Financial compensation will therefore not be paid until the definitive (post-transitional) period commences on 1 January 2026, after which the goods listed may only be imported into the customs territory of the European Union by authorised CBAM declarants.
IV. How are CBAM certificates acquired in the definitive period and at what carbon price?
Each Member State will sell CBAM certificates to authorised CBAM declarants established within its territory using a common central platform set up and administered by the Commission (Article 20(1) CBAM Regulation). Information on the certificates bought will be transferred to the declarant’s account in the CBAM registry. The price of the certificates will be calculated as the average weekly price for EU ETS allowances and published by the Commission on the common platform (Article 21 CBAM Regulation).
As from 2027, by 31 May of each year each authorised CBAM declarant must surrender through the CBAM registry the number of certificates equal to the embedded emissions for its imported goods in the calendar year prior to the surrender (Article 22(1) CBAM Regulation). “Embedded emissions” means direct emissions released during the production of goods and indirect emissions from the production of the electricity consumed during the production processes (Article 3, no. 22 CBAM Regulation). Where a carbon price has been paid for the declared embedded emissions in the country of origin (in the form of a tax or levy or under an ETS (European Commission, Guidance document on CBAM implementation for installation operators outside the EU, section 6.10, p. 159 et seq.), the declarant can claim a reduction in the number of CBAM certificates to be surrendered (Article 9(1) CBAM Regulation). The declarant must show that the declared embedded emissions were subject to a carbon price in the country of origin and that this has been paid (Article 9(2) CBAM Regulation). The Commission is empowered to adopt implementing acts on conversion of the yearly average carbon price paid into a corresponding reduction in the number of CBAM certificates to be surrendered, including conversion of foreign currency into euro (Article 9(4) CBAM Regulation).
The number of CBAM certificates to be surrendered will also be adjusted to reflect the extent to which EU ETS allowances have been allocated free of charge (Article 31(1) CBAM Regulation).
The Commission is empowered to adopt implementing acts with detailed rules for calculating the adjustment, having regard to the various benchmarks used in the EU ETS for free allocation (Article 31(2) CBAM Regulation).
Finally, each authorised CBAM declarant must ensure that the number of CBAM certificates in 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 (Article 22(2) CBAM Regulation). If excess certificates remain in a declarant’s account in the CBAM registry after the surrender date, the Member State where the authorised CBAM declarant is established must buy back the excess at the declarant’s request (Article 23 CBAM Regulation). The repurchase price for CBAM certificates is the price paid at the time of purchase. On 1 July of each year, the Commission will cancel without compensation all CBAM certificates purchased in the calendar year before last and still in the accounts of CBAM declarants (Article 24(1) CBAM Regulation). Unlike under the EU ETS, importers cannot trade CBAM certificates. This is to ensure that importers do in fact pay a fixed carbon price.
V. What other factors must be taken into account?
Only authorised CBAM declarants may import goods into the customs territory of the Union (Article 4 CBAM Regulation). Importers (or their indirect customs representatives) must therefore apply for authorisation and may only import goods after receipt of authorisation (Article 5 CBAM Regulation). The Commission must set up a CBAM registry of authorised CBAM declarants for this purpose and make the information in the registry available automatically and in real time to customs authorities and competent authorities (Article 14(1) CBAM Regulation). This is to ensure that however many parties are involved in the importation process, each tonne of imported goods is reported only once, i.e. not reported twice nor omitted from reporting altogether (European Commission, Guidance document on CBAM implementation for importers of goods into the EU, section 4.3.1, p. 17).
From 2027, authorised CBAM declarants must use the CBAM registry to submit the CBAM declaration due from them by 31 May of each year (Article 6(1) CBAM Regulation). The declaration must contain the following information (Article 6(2) CBAM Regulation):
- the total quantity of each type of goods imported during the previous calendar year, expressed in megawatt hours for electricity and in tonnes for other goods;
- the total embedded emissions, expressed in tonnes of CO2e emissions per megawatt hour of electricity or, for other goods, in tonnes of CO2e emissions per tonne of each type of goods;
- the total number of CBAM certificates to be surrendered after any reduction for a carbon price paid in a country of origin and adjustment to reflect EU ETS allowances allocated free of charge;
- copies of the verification reports issued by the accredited verifier.
VI. What penalties are in place and how will the CBAM be enforced?
During the transitional period, penalties of between EUR 10 and EUR 50 per non-reported tonne of embedded emissions apply. The precise figure will be set taking into account the extent of unreported information, the unreported quantities of imported goods and the unreported emissions relating to those goods, the readiness of the reporting declarant to correct the situation and the (past) behaviour of the reporting declarant (Article 16(1) to (3) Implementing Regulation).
During the definitive period, authorised CBAM declarants will be liable for a penalty if they fail to surrender their certificates by 31 May of each year (Article 26(1) CBAM Regulation). These penalties do not release the declarant from the obligation to surrender the outstanding number of CBAM certificates retrospectively (Article 26(3) CBAM Regulation). Penalties will also be imposed on persons other than authorised CBAM declarants should they introduce goods into the customs territory of the Union. The penalty for authorised CBAM declarants for excess emissions is EUR 100 per tonne of CO2e emitted by the installation for which the operator has not surrendered allowances (Article 26(1) CBAM Regulation in conjunction with Article 16(3) Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC). The penalty for persons other than authorised CBAM declarants is three to five times this amount, depending on the duration, gravity, scope, intentional nature and repetition of the non-compliance and on the level of cooperation of the person with the competent authority (Article 26(2) CBAM Regulation). Penalties are enforced by the competent national authorities.
The Commission will take action against practices circumventing the CBAM Regulation. These practices include slightly modifying affected goods in order to bring them under CN codes not covered by the CBAM Regulation but without altering their essential characteristics, or artificially splitting shipments into consignments with an intrinsic value that does not exceed the EUR 150 threshold (Article 27 CBAM Regulation).
VII. What needs doing?
Businesses first need to establish who is responsible for fulfilling any authorisation, declarative and other CBAM obligations and whether an indirect representative should be appointed for this. They must also identify and calculate the (embedded) emissions in relevant goods (European Commission, Guidance document on CBAM implementation for installation operators outside the EU, section 6.4.1, p. 105) in order to comply with the reporting obligation starting on 1 October 2023. Attention should be paid in particular to whether a different emissions trading instrument already applies to the goods and whether this falls under the CBAM. Finally, it is important to consider whether there may be any economically reasonable ways of avoiding or minimising liability risks under the CBAM for a product line and the supply chain. For example, whilst hydrogen is within the scope of the CBAM, this is only the case for synthetic gases and e-fuels if they are produced using hydrogen that is subject to the inward processing procedure and thus in-scope as a processed product, cf. Article 2(1) CBAM Regulation (the inward processing procedure pursuant to Article 256 Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code allows non-Union goods to be used in processing operations in the customs territory of the Union without being subject to duties or commercial policy measures). If, in contrast, the inward processing procedure is not relevant, i.e. if the synthetic gases or e-fuels are produced in a non-EU country and only imported after production, the CBAM will not apply. This opens up opportunities through changes in production. Given the extensive reach of the CBAM, focussing on the products it does not cover may be beneficial.
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