What is the Carbon Border Adjustment Mechanism (CBAM)?
The Carbon Border Adjustment Mechanism (CBAM) is an initiative in the European Union that is designed to combat “carbon leakage”. This is the term given to manufacturing emissions that are released outside of the European Union.
Although the EU is able to regulate emissions from domestic manufacturers, companies that are importing goods are able to enter the same products into free circulation that are not held to these standards. This has led to many companies outsourcing their manufacturing to avoid paying premium for emission-regulated products.
To ensure regulation of emissions across the market, the European Union has developed the CBMA to hold importers accountable for making their shipments more carbon-neutral through the purchase of carbon credits.
If you are importing a CBAM-applicable product, how this works is you must neutralise the emissions by sponsoring a green initiative that combats the amount of carbon produced during your manufacturing process.
The cost of CBAM certificates will be determined by the current EU Emissions Trading System (ETS) allowances for that product. Once the Carbon Border Adjustment Mechanism has been fully implemented, it is expected to cover at least 50% of emissions for ETS-covered commodities.
Which commodities are covered by the Carbon Border Adjustment Mechanism?
The Carbon Border Adjustment Mechanism (CBAM) will introduce more commodities to the scheme as testing, implementation, and the phase-out of ETS free allowances all progress.
To start, the initiative will cover some products from the following sectors:
- Cement
- Articles of iron and steel
- Fertiliser
- Articles of aluminium
- Electrical components
- Hydrogen
- Chemicals
The mechanism does not apply to:
- Shipments with a value under EUR 150.00
- Personal effects where the CBAM-related products have a value of less than EUR 150.00
- Military movements
If you are importing CBAM-related products into the European Union, book a quick scan with one of our consultants to learn how your documentation may need to change to declare emissions.
How will the CBAM be phased in?
Transition phase
The Carbon Border Adjustment Mechanism will enter its first phase on 1st October 2023, which will end on 31st December 2025. During this time, you must submit quarterly reports to the CBAM Commission which outline the following details:
- Quantity of the product imported.
- Direct and embedded carbon emissions.
- Carbon costs in the country of origin.
- Resulting compensations to be paid.
Your first report must be submitted by 31st January 2024.
Operational stage
From 1st January 2026, the purchase of CBAM certificates will be required for all imports of related products. You must make an annual declaration for your imports to the commission, either directly or through a CBAM-authorised declarant.
Your first declaration is due by 31st May 2027, and you cannot submit your information to customs without holding CBAM-authorised declarant status.
What effect will the mechanism have on trade prices?
The Carbon Border Adjustment Mechanism will raise the cost of your goods if the emissions do not already meet standards, and will also add administration costs to your company because of the additional reporting.
If your goods do not meet CBMA requirements, then you can expect additional costs for the offsetting of carbon emissions at origin, or through the purchase of CBAM certificates.
However, these costs also apply to other suppliers in your industry. The only advantage will be for importers who are already buying from suppliers with lower embedded emissions.
Speak to a customs consultant about how you can evaluate potential suppliers today.
CBAM legislation is still being written
The final regulations and protocols for the Carbon Border Adjustment Mechanism are still under discussion. The mechanism was born from the Fit for 55 initiative, which aims to revise EU legislation so that the European Union can reduce their emissions by 55% by 2030.
It is estimated that legislation will be confirmed and take effect by 1st January 2024. Note that your reporting period will begin before this date, but your first quarterly report is due afterwards.
Will you be affected by the Carbon Border Adjustment Mechanism?
The Carbon Border Adjustment Mechanism brings a necessary complication to supply chains in the EU as climate change becomes more prevalent in customs processes. If you need help preparing for CBAM or other environmental initiatives, contact us for more information.