What are the implications of the Carbon Border Adjustment Mechanism (CBAM)?

I. Purpose

The Carbon Border Adjustment Mechanism (cf. Regulation (EU) 2023/956 of 10th May 2023 establishing a carbon border adjustment mechanism; “CBAM”), aims to put a price on greenhouse gas emissions from imports at the same level as products manufactured in the EU.

The intention is to prevent companies from benefiting from outsourcing their production to countries outside the EU with lower CO2 pricing, so-called carbon leakage. CBAM is designed to ensure that companies in the EU are not unfairly disadvantaged by having to bear higher climate change costs than their competitors outside the EU.

II. Background

Creating a level playing field in the context of the cost of emissions is particularly important, as the cost of CO2 emission certificates is expected to rise significantly by 2034, when the current free allocation of emission allowances ends.

III. Applicability of CBAM

The CBAM reporting duty concerns all EU-based companies importing iron, steel, cement, aluminium, electricity, fertilisers, hydrogen and certain upstream and downstream products in pure or processed form from non-EU countries. An extension of the scope of imported materials is to be expected by 2026.
IV. Current and future duties under CBAM

1. Transition Period
The introduction of CBAM will take place gradually as of 1st October 2023 with a transition period until 31 December 2025. During this transitional period companies importing certain goods are obliged to submit quarterly reports on the greenhouse gas emissions of their exports. However, no compensation payments will have to be made at this point.

2. Full implementation
Major changes are to be expected as of 1st January 2026 when the transitional period ends. Firstly, imports will be limited to expressly authorised CBAM declarants. Companies may apply for such authorisation as of 31st December 2024.

Furthermore, as of 1st January 2024 companies will be subject to the CBAM greenhouse gas emission pricing, the prices for the respective certificates will gradually increase. At the same time, reporting will only be made on an annual basis.

3. Reporting Details
The CBAM report shall in particular contain the following information:

•  total quantity of each type of imported commodity, in megawatt-hours for electricity and in tonnes for other commodities;
• total actual embedded emissions for each commodity;
• total of indirect emissions for each commodity; and
• CO2 prices paid in a country of origin.