On 17 August 2023, the European Commission has adopted the Regulation laying down the rules for the application of Regulation (EU) 2023/956 of the European Parliament and of the Council as regards reporting obligations for the purposes of the Carbon Border Adjustment Mechanism during the transitional period (hereinafter: the Regulation) establishing the detailed rules for the implementation of the CBAM mechanism in the period from 01 October this year to 31 December 2025.
The Carbon Border Adjustment Mechanism (hereinafter: CBAM) is part of the EU’s environmental protection policy and is an instrument designed to support the EU’s climate ambitions to achieve a net reduction in greenhouse gas emissions (hereinafter: GHG) of at least 55% by 2030 and reaching climate neutrality by 2050 at the latest.
CBAM complements the EU Emissions Trading System (EU ETS), as part of the EU “Fit for 55” legislative package. Under the EU ETS, operators of goods with high carbon emissions submit emission permits for each tonne of CO2 emissions. With this, producers face a “carbon price” that tracks their GHG emissions. However, producers in many non-EU countries do not have such an obligation, and this competitive advantage puts European products at risk of “carbon leakage”, i.e. moving production outside the EU.
CBAM ensures that importers of goods from non-EU countries incur similar costs for the “embedded emissions” of imported goods. However, this only affects certain industries, namely cement, iron and steel, aluminum, fertilizers, hydrogen and electricity.
The detailed Regulation in question provides information on reporting obligations during the transition period for EU importers of CBAM goods, as well as a methodology for calculating the incorporated emissions released during the production process of CBAM goods.
In accordance with the Regulation, and in order to introduce CBAM gradually, the EU has prescribed steps for companies to adapt, so the transitional period begins on October 1, 2023, and ends on December 31, 2025. During this period, EU importers will only have to calculate the carbon emissions levels of their suppliers, and report this information quarterly.
The final period starts on January 1, 2026 and involves two phases: from 2026 to 2033, embedded emissions for CBAM commodities will gradually be covered by the CBAM obligation, and from 2034, 100% of embedded CBAM commodity emissions will be covered by CBAM certificates.
Within the transitional system, importers, who are the subjects of reporting on embedded emissions, cooperate with manufacturers to assess information on how much emission their production had. This includes direct emissions, but also emissions carried by their production inputs, the electricity they consume, and other indirect emissions. EU authorities will be in charge of maintaining the Register – an online database that contains all information on the embedded emissions of CBAM products.
In the transitional period, importers of CBAM products will not suffer direct costs related to this mechanism, but the sanctioning of incomplete or irregular reporting of emissions is foreseen, which sanction is calculated according to the ton of undeclared carbon emissions. In order to better adapt reporting entities, the European Commission has also published detailed instructions for the application of CBAM.
The industries for which CBAM is relevant have been working diligently on education and adaptation to this system for a long time, but the first reporting quarter will certainly be marked by many doubts, administrative costs, as well as the unpreparedness of producers in the entire supply chain.