Demystifying EU CBAM: Six pains and predictions

Published on
May 29, 2024
Demystifying EU CBAM: Six pains and predictions

Will the EU water down requirements for primary data? Will it simply cost too much for companies to comply? Recently publications and concerns cast doubt over the viability and implementation of aspects of the CBAM regulation. In light of this, CarbonChain’s Nick Ogilvie assesses some of the key claims…

Six months and two reporting deadlines have passed since the European Union’s Carbon Border Adjustment Mechanism (EU CBAM) came into force. Importers of key goods like steel, aluminum, and fertilizers have faced new challenges in data management, emissions tracking, and supplier engagement. 

This is just the beginning. In 18 months, the full implementation of CBAM will put a price on reported carbon emissions, marking a new era of global commerce where carbon reporting becomes part of customs processes.

The teething challenges of the declaration process, and response from key export markets have led to an open letter from the International Chamber of Commerce (ICC) calling for a rethink. Commentators have used reports like the IETA’s International ‘Reaction to the EU Carbon Border Adjustment Mechanism’ to predict that the EU will have to introduce leniency on key rules, while a senior European Commission official claimed sanctions for non-compliance are “the last resort”.

Let’s look at the validity of six common claims: 

Claim 1: Using the reporting platform is simply too difficult and marred by errors

Verdict: These issues have been fixed and deadlines extended.

The ICC letter highlighted the technical issues that blocked many companies from accessing the platform, such as validation errors and even data deletion. 

However, the European Commission acted swiftly to amend these errors, published extensive information on known IT issues, and allowed affected importers to request over a month’s extension. Furthermore, the first three CBAM reports can be amended until 31st July 2024. Luckily, CarbonChain’s customers were able to successfully submit their first two CBAM reports on time, and were protected from data loss due to using an XML reporting tool to facilitate the process.

Claim 2: Accessing the CBAM Registry is too complex because of the decentralized process

Verdict: These processes are now streamlined and clear on National Competent Authority websites. 

Access to the CBAM reporting platform is granted by each Member State’s appointed NCA (National Competent Authority). However, many appointments were delayed, including in Germany, causing a number of declarants to be locked out until the last minute. Additionally, different NCAs had varying processes for granting access, creating confusion for declarants with presence and trade in multiple States.

These issues have mostly been resolved, and NCAs’ email support channels, overwhelmed early on in the reporting process, are now more efficient. Luckily, businesses need only register in their Member State of establishment, and goods imported into the EU can be declared centrally. Declarants, in most cases, already have the necessary credentials due to pre-existing tax and customs reporting requirements within their Member State.

Claim 3: The administrative and cost burden is disproportionate for small companies

Verdict: This is a key challenge, with plausible solutions for the EU to consider. 

Small businesses trading low volumes of goods like nuts, bolts and screws may find themselves within the scope of CBAM but without the infrastructure to handle the additional bureaucratic and cost burden. The European Commission aimed to mitigate this with a de minimis threshold of EUR 150 per consignment, which the ICC letter argues is too low. 

The requirement to identify specific installations involved in producing the goods is particularly challenging. Businesses often buy these low-value items through intermediaries like service centers or part distributors. These intermediaries tend to aggregate the underlying products by specification, not by supplier, making it near impossible for the purchaser to match the original installations to the goods cleared into the EU. A distributor in the US may work with thousands of vendors across hundreds of thousands of parts, for example. 

The Commission could consider adding weight as a factor in the de minimis threshold or allowing smaller importers to use default values more permanently.

Claim 4: Fines won’t be enforced and primary data won’t be required

Verdict: Despite talk of ‘leniency’, there’s currently no solid evidence that non-complying importers can entirely escape penalties or that default values can be used indefinitely.  

Let’s start with the key dates and official stance:

  • 31st July 2024: Last CBAM report to accept EU-provided default emissions values for each CN code. 
  • 31st October 2024: Declarants must start using primary emissions data from their suppliers, calculated using EU-approved methodologies – or face possible fines of 10-50 Euros per tonne of under-reported or non-reported carbon dioxide equivalent (tCO2e).

Leniency on this rule is not mentioned at all in the latest expert group committee meeting minutes.

However, a European Commission spokesperson told Carbon Pulse that importers “will not face excessive penalties”, and that sanctions are a “last resort” for those showing “clear unwillingness to play the game”. (This is why CarbonChain recommends keeping detailed records of your “good will” and efforts to comply). 

What should companies conclude? Can importers now take their foot off the pedal and avoid supplier engagement before October? 

Without any official announcement of changes to requirements or an erasure of fines, it would be wise for companies to proceed according to the published regulation. There are three key advantages to doing so, which will stand even if the EU does loosen rules ahead of October:

  1. Stay ahead: Continue engaging suppliers for the October milestone, to avoid mixed messages and last-minute confusion. Supplier engagement and carbon accounting at installations can take several months;
  2. Gain a competitive edge: Use the high-quality primary data obtained to set goals, and expand data collection from suppliers to create full product carbon footprints before your competitors;
  3. Prepare for other ESG reporting: Improving collaboration with suppliers now can support other sustainability and social impact reporting obligations (e.g. Scope 3 CSRD reporting, EU CSDDD, Modern Slavery Act).

Critically, at the policy level, the transitional period will be ineffective if CBAM sticks to default values for too long and fails to penalize non-compliance:

  • The use of default values was limited to ensure a level playing field between EU Emissions Trading System (ETS) measurements and third-country installations. The EU ETS uses primary data and rigorously penalizes misreported tCO2e. Relaxing these rules for CBAM would undermine this objective – not to mention the significant time required to amend EU legislation.
  • Global trade flows need to be ready for 1st January 2026, when the full implementation of CBAM introduces a carbon tariff – and this is no trivial matter. The EU knows that it must incentivize importers and suppliers now to implement primary data collection, so that processes are in place to price emissions properly and fairly in 2026. 
  • Default values are penalizing (they are marked up to represent higher than average emissions per CN code). So, in theory, allowing the use of default values indefinitely could still encourage importers to obtain primary data (because this primary data might be lower) once CBAM certificates have to be purchased. However, there would be no clear incentive for those who find that their actual product emissions are higher than default values. 
CBAM is not a mere box-ticking compliance exercise designed to punish high-carbon sectors with one broad brush. It’s designed to differentiate low-carbon from high-carbon goods and encourage emissions reductions within key industries that are critical for the net-zero transition. Only primary data can enable this. 

Claim 5: Primary data calculations are too challenging

Verdict: The CBAM methodology for emissions calculations is comparatively clear and straightforward.

The perceived difficulty lies in measuring emissions at installations, especially because CBAM’s methodology differs from globally accepted carbon accounting standards that installations might already be using, including the Greenhouse Gas Protocol’s Product Life Cycle Accounting and Reporting Standard (more commonly known as Product Carbon Footprinting or PCFs). 

That causes some confusion for both declarants and installations and can result in two separate carbon accounting data sets being maintained by the reporting company.

However, the CBAM method not only aligns with the EU ETS carbon accounting requirements, but is simpler and more straightforward than PCFs:

  • CBAM and PCFs have different emissions calculation boundaries. While PCFs cover the full ‘cradle-to-gate’, CBAM excludes certain precursors and transport-related machines, and only considers machines that are static;
  • Under CBAM, emissions are measured at the commodity code (CN) level, rather than the product level. So if your installation produces a wide range of fasteners to different specifications, but they’re all captured by the same CN code, then under EU CBAM you can calculate one average carbon intensity for all those products.

This does mean that CBAM carbon accounting alone isn’t sufficient for wider carbon reporting and net-zero reductions goals (so we would encourage installations to implement Product Carbon Footprinting at the same time), but it does mean the barrier to entry is lower than it might seem. 

In our experience working with CBAM-affected installations, we see that primary material producers (crude steel, aluminum ingots and mixed fertilizers) are generally progressing well with this requirement, especially those already subject to their own national emissions reporting schemes. For these organizations, the exercise is largely (though not solely) a rejigging of existing data.

It gets trickier for producers of so-called complex goods (who have to get data from their own suppliers). But, it boils down to four key steps for minimum compliance:

  1. Identify their own produced CBAM goods, CBAM precursors and aggregate production process at the CN-code level;
  2. Request EU CBAM data from their own precursor suppliers;
  3. Obtain information on annual electricity and fuel consumption. This information is generally on hand from finance departments (e.g. electricity and gas bills);
  4. Prepare the EU Communication data template for customers with this information.

Claim 6: Collecting supplier data is impractical and can be blocked by confidentiality concerns

Verdict: This is a genuine challenge in certain markets, but there are steps importers can take to limit friction in their data collection. 

CBAM compliance requires an unprecedented scale of supplier engagement. Even those who were already sending carbon disclosure requests to suppliers or collaborating on net-zero goals will need to accelerate these engagement plans to meet the CBAM deadlines. The practical challenge is requesting, collecting and tracking data across different supply chain tiers – a process that CarbonChain’s CBAM reporting hub streamlines for importers and installations. 

The IETA and ICC both highlight concerns about data protection and suppliers’ reluctance to share confidential information. The European Commission is aware of this challenge, and is exploring ways to manage operator and installation data, including the possibility of a central portal to store and manage installation data on behalf of importers. 

Meanwhile, you ultimately don’t know which of your suppliers will provide your data until you ask – and the clock is ticking. Sending requests is the first step, and we recommend that importers track every effort they’ve made to source emissions information from suppliers. Installations must ultimately recognize that unless they provide this data, EU importers cannot, without facing penalties, continue procuring goods from them longer term.

The EU CBAM doesn’t have to be painful.

With CarbonChain’s self-serve CBAM hub, your business can securely collect and validate supplier data, generate XML declarations and educate your suppliers on emissions monitoring methodologies via our comprehensive CBAM Knowledge Hub. Access is available for importers and installations and is free for a limited time: until October 2024. 

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Nick Ogilvie
Written by
Nick Ogilvie
Customer Success Manager, CarbonChain

Need help measuring your Scope 3 emissions for your reporting? Get in touch with CarbonChain today.

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