On October 1, 2023, the European Union’s Carbon Border Adjustment Mechanism (CBAM) became effective in its transitional phase until December 31, 2025. The European Commission (EC) noted that the transitional phase will serve as a pilot and learning period for stakeholders and will be used to collect information on embedded emissions to further refine and improve the CBAM’s methodology. We expect other countries to consider and adopt their own border carbon adjustments to avoid carbon leakage and to ensure the competitiveness of domestic emission intensive and trade exposed sectors of the economy (see our earlier bulletins on the development of BCAs in Canada and USA). This bulletin briefly highlights key information related to the transitional phase of the CBAM.
CBAM Overview. The CBAM applies to importers of CBAM-covered goods. Importers of covered goods must register with national authorities, through which they will also able to buy CBAM certificates once the CBAM is fully in place on January 1, 2026. The price of certificates will be calculated depending on the weekly average auction price of EU Emission Trading System (ETS) allowances expressed in €/tonne of CO2 emitted. Importers into the EU are required to declare the direct and indirect emissions embedded in imports and, once fully operational, “surrender” the corresponding number of CBAM certificates each year; however, initially, importers will only be required to pay for direct emissions. Importers may reduce the number of certificates to be surrendered if they can prove that a carbon price has already been paid during the production of the imported goods and this price will then be deducted from the overall obligation.
Applicability
The CBAM will initially apply to the following imports of certain goods and selected precursors that are carbon intensive and at significant risk of carbon leakage:
- cement;
- iron and steel;
- aluminium;
- fertilisers;
- electricity; and
- hydrogen.
The EC noted that the enlarged scope of the CBAM will eventually capture more than 50% of emissions in ETS covered sectors once fully operational.
Reporting Requirements
Until the end of 2024, companies will have the choice of reporting in three ways:
- full reporting according to the new methodology (EU method);
- reporting based on an equivalent method (three options); and
- reporting based on default reference values (only until July 2024).
The EC indicated that as of January 1, 2025, only the EU method will be accepted and estimates can only be used for complex goods if they represent less than 20% of the total embedded emissions. In addition, the EC is expected to publish default values by the end of 2023, so that they may contribute to the reports that importers must submit by the end of January 2024.
Next Phase
The EC indicated that the permanent CBAM system will enter into force on January 1, 2026. The phasing-out of free allocation under the EU ETS is also scheduled to take place in parallel with the phasing-in of CBAM throughout the 2026-2034 period.
