The EU's Carbon Border Adjustment Mechanism: What you need to know

Last updated: 22^nd May 2023

Do you import aluminum, steel, fertilizers, electrical energy, or cement into the EU? Or downstream products such as screws and bolts? Are the goods produced outside the EU?

In a few months, your imports will be subject to the new Carbon Border Adjustment Mechanism (CBAM), with penalties for non-compliance.

But what is the CBAM, how will it work, and what should you do to prepare? Here’s what businesses need to know.

What is the CBAM?

The CBAM is a new carbon regulation — a type of carbon pricing — to help the EU fight climate change.

While the existing EU Emissions Trading System (ETS) covers EU countries, the CBAM will apply to goods produced outside the EU.

This addresses the problem of carbon leakage; that is, the situation where companies move the production of goods to countries with less stringent emissions policies, primarily to save costs associated with carbon pricing.

Unlike the ETS’s ‘cap-and-trade’ system, the CBAM (at least in its initial form) won’t set caps on imports or emissions, and there’ll be no trading of carbon permits.

How it works:

Note: As of 15 May 2023, the European Commission has agreed the transitional period (reporting without 'financial adjustment' in the form of CBAM certificate purchasing) will end on 1 January 2026. Free allowances for sectors covered by the EU ETS will end by 2034 (phased out from 2026). During this time the CBAM will apply only to the proportion of emissions that does not benefit from free allowances under the EU ETS, in order to fully respect the World Trade Organisation's rules.

Example

It’s November 2023 and you’re importing 1,000 tonnes of aluminum from South Africa to Rotterdam.

At the end of the quarter, you’ll have to submit a CBAM report to the European Commission, declaring the total greenhouse gas emissions embedded in your aluminum consignment.

This includes emissions released in manufacturing the aluminum (direct emissions). Initially, emissions released in the production of electricity used in the manufacturing process (indirect emissions) will not be included.

If you imported other CBAM products in that period, you’ll need to include their emissions in the report too.

If you can’t get primary emissions data for a production facility, then you’ll use the Commission’s default values (based on averages) in your calculations. These default values could be higher than the actual emissions, and from 2026 you’ll have to pay that price (you'll purchase one CBAM certificate for each tonne of reported direct emissions, at the cost of the latest weekly average ETS carbon price).

EU_CBAM-101-FactSheet

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Get a detailed breakdown of the CBAM requirements.

How to prepare for the CBAM

Uncover the hidden emissions in your imports

Do you know your suppliers when it comes to carbon? A product’s emissions can vary hugely between different countries and production facilities. Ensure you don’t get any unwelcome surprises.

Start gathering production emissions data now to:

Understand how CBAM could impact your profit and loss
See what default values could look like for your products
Identify lower-carbon suppliers and secure multiyear procurement contracts

If any of your suppliers aren’t yet tracking their carbon footprint, encourage them to start measuring production emissions, so they can provide you with actual primary data from 2023. Although there’ll be no financial adjustment until 1 January 2026 for your imports’ embedded emissions, the more accurate data the Commissions collects before that, the fairer their default values are likely to be.

2023 is a golden opportunity. 2026 is too late

Businesses only have two annual CBAM processes to go through before the CBAM comes into full swing. If you get your house in order now, you’ll have time to embed carbon accounting and supplier engagement into your processes, and get your supply chains ready for the rising cost of carbon.