How will the new Carbon Border Adjustment Mechanism (CBAM) affect your business?

CBAM was implemented from 1 October 2023 and is an environmental policy instrument designed to apply an additional carbon price to goods imported into the EU, where the local carbon price in the country of origin is lower than that in the EU.

In 2005 the EU implemented an Emissions Trading Scheme (ETS), to apply a carbon price to certain goods manufactured in the EU. It is a cap-and-trade scheme where the maximum cap is set on the total amount of greenhouse gas emissions for all companies in scope of the regulation.

CBAM is closely related to the EU ETS allowances and reporting mechanisms, and aims to discourage carbon leakage, where companies move production of goods from the EU to overseas or import goods from non-EU countries to avoid carbon tax.

What is in scope for EU CBAM?

CBAM currently covers the import of the following products into the EU:

• iron and steel: Steel plates, pipes, iron bars;
• aluminium: Aluminium sheets, bars and profiles;
• cement: Portland cement, cement clinkers;
• hydrogen: Hydrogen gas;
• fertilisers: Mineral and chemical fertilisers; and
• electricity: Electricity generated from fossil fuels.

The first products in scope for CBAM have been selected due to the carbon intensive production methods perceived risk of carbon leakage. However, the scope is likely to be increased further as the transition period acts as a pilot, with only 50% of the emissions covered by EU ETS being represented in the proposed CBAM sectors.

Businesses that import affected products into the EU should review the implications of CBAM. Where businesses are importing other goods, it is recommended that CBAM is kept in review.

What is the timeline for implementing CBAM in the EU?

October 2023

CBAM implementation begins requiring importers of regulated products to collect data for submission in 2024 regarding the embodied emissions of products.

31 January 2024

The first quarterly report of embedded product emissions is due. The European Commission has produced guidance for reporting embodied emissions and a template report.

1 January 2025

The EU method is required for calculating embedded product emissions.

2026

Importers will need to declare the quantity of goods imported into the EU in the preceding year, and the embedded greenhouse gas emissions. They will surrender the corresponding number of CBAM certificates.

2026-2035

Phasing out of free allowances under the EU ETS will take place in parallel with the phasing in of CBAM certificates.

What is the impact on businesses?

Importing companies will need access to the relevant data to report the embedded emissions associated with the products they import into the EU. Exporters of CBAM products destined for the EU will need to be able to report embedded emissions of products to aid customers declarations, where this results in additional cost this may affect the supply chain. After the transition phase, companies importing CBAM products into the EU where a carbon adjustment is required will be obligated to purchase carbon certificates increasing the cost of the products in the supply chain.

What are embedded emissions?

During the transition period, companies will be required to report direct and indirect emissions (making up the ‘embedded emission’) at each installation. An installation is a stationary technical unit where a product process takes place, for example a factory.

Direct emissions include combustion and process emissions at the installation. Indirect emissions include emissions related to electricity consumed at the installation. If companies make complex goods, the embedded emissions of components should be included if relevant for the final good.

Companies will need a method for calculating the embedded emissions for imported goods.

Steps to take now

Companies need to act now to assess compliance and potential cost implications of the introduction of CBAM in the EU. We would recommend the following initial actions:

• review combined nomenclature codes of products to identify whether any CBAM-applicable goods are imported into the EU and whether you will be required to report under the CBAM regulations;
• identify correct stakeholders within the business to manage and implement processes and controls to comply with CBAM regulations; and
• review the approach taken to calculate emissions at installations producing CBAM goods.

Businesses will be required to use the EU method by 1 January 2025.

To find out more about how you can assess compliance and potential cost implications of the introduction of CBAM in the EU, please contact Rich Hall, Grace Kirk or Carys Tetlaw.