Do you import aluminum, steel, iron, fertilizers, electrical energy, hydrogen or cement into the EU? Are the goods produced outside the EU?
In less than a month, 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.
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.
The European Commission has agreed that the CBAM's transitional phase will end on 1 January 2026. Until then, emissions reporting is required without 'financial adjustment' through certificate purchasing. 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. You'll need to:
At the end of the quarter (by 31 January 2024):
Importers will need 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 the manufacturing of the aluminum (direct emissions), certain upstream emissions and indirect emissions (although these indirect emissions will not initially be subject to the carbon tax that begins in January 2026).
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 for upstream materials, 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).
This process repeats every quarter (30 April 2024 for the second report) and the first two reports can be updated until 31 July 2024 if the importer gets better quality data.
Track your CBAM imports and emissions data with confidence.
Businesses only have a matter of months to get organized for the first CBAM deadline. Get equipped with CarbonChain’s supplier engagement and carbon reporting solutions:
Know your suppliers when it comes to carbon. Get ready for your quarterly CBAM emissions declarations, starting in January 2024:
A product’s emissions can vary hugely between different countries and production facilities. Quantify the upcoming cost of the CBAM and start decarbonizing your supply chains:
The CBAM is not officially a carbon tax. However, from 2026 it will function in similar ways to a carbon tax, by requiring companies to make financial payments (or 'adjustments') according to the greenhouse gas (GHG) emissions embedded in their imports of aluminum, steel, fertilizers, electrical energy, hydrogen and cement. Importers will report these emissions, then purchase and surrender CBAM certificates at the same cost per tonne of carbon dioxide equivalent as the average EU ETS carbon price for the past week.
The CBAM regulation has been officially passed and has entered into force. It was published in the Official Journal of the EU on 16 May 2023. The transitional phase will begin on 1 October 2023 and the permanent system enters into force on 1 January 2026.
The CBAM covers high-emitting commodities including electric energy production, cement, aluminum, fertilizers, iron, steel and hydrogen. Certain precursors and other downstream products like screws and bolts are likely to be included.
The EU Emissions Trading System (ETS) sets a cap on the amount of greenhouse gas (GHG) emissions that can be released from industrial installations in certain sectors within the EU. Allowances are bought on the ETS trading market.
The CBAM complements the EU ETS by covering goods imported from outside the EU. When fully phased in, will cover more than half of the emissions in ETS-covered sectors. Unlike the ETS, there will be no 'cap and trade' system under the CBAM.
The CBAM certificate prices will mirror the EU ETS price (averaged on a weekly basis).
During the transitional period, importers must report the indirection emissions of all goods.
After the transitional period (from January 2026), indirect emissions will only be included in the CBAM carbon pricing scheme certain goods, at least initially:
Explore our analysis of the costs of the CBAM with and without indirect emissions for aluminum and steel.
In the CBAM transitonal period implementing regulation, upstream emissions are included for certain goods only: i.e. complex goods.
A simple good doesn’t have any embodied emissions from upstream materials or energy sources. The only emissions associated with a simple good are those directly related to its production process.
A complex good on the other hand does have some embodied emissions from upstream materials.
In the case of aluminum, aluminum ingot is a simple good: emissions from the production of bauxite, alumina, anodes, and all other materials and energy used in the production of the ingot are not included in the calculation of carbon emissions.
Products that use aluminum ingot as an input are complex goods: the production of the ingot needs to be included in the calculation of the carbon emissions associated with these products.
The UK CBAM is a separate but similar mechanism to address carbon leakage. Learn more about the UK CBAM.