*Last updated: 13 December 2022, following provisional agreement reached between MEPs and European Council*
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 less than a year, 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?
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 13 December 2022, the exact end date for the transitional period (reporting without associated certificate purchasing) is uncertain, but likely to end by 2027; the Council has agreed that a minimum three-year transition period will be needed. 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.
It’s November 2023 and you’re importing 1,000 tonnes of aluminum from South Africa to Rotterdam.
At the end of the quarter (within a month, by 31st December 2023), 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)
- emissions released in the production of electricity used in the manufacturing process (indirect emissions)
If you imported other CBAM products in that quarter, 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 2027 you’ll have to pay that price (from 2027, you'll purchase one CBAM certificate for each tonne of reported direct emissions, at the cost of the latest weekly average ETS carbon price).
Get a detailed breakdown of the CBAM requirements.
How to prepare in 2022 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 and indirect (electricity usage) emissions, so they can provide you with actual primary data from 2023. Although there’ll be no financial adjustment until the end of the transition period (likely to be 2027) 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. 2027 is too late
Businesses only have three or four annual 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.