The EU’s Carbon Border Adjustment Mechanism (CBAM), explained

The Carbon Border Adjustment Mechanism (CBAM) is a key component of the EU’s sustainability plans, designed to put a price on carbon-intensive imports. 

For businesses importing into the EU, CBAM introduces new reporting requirements and financial obligations. Importers will need to report on the embedded emissions in their goods and, in the future, purchase CBAM certificates to cover these emissions. 

CBAM is a challenging – but essential – sustainability legislation to be addressed by both EU businesses and businesses that export to the EU. Here’s a breakdown of CBAM, what it means for your business, and how to prepare for compliance.

What is CBAM?

The EU’s CBAM puts a carbon price on certain imports to the Union. It’s part of the “Fit for 55 in 2030 package” – the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.

The legislation is designed to ensure that the carbon price paid for EU products is also applied to imported goods, creating a level playing field. It also requires value chain engagement, in that EU businesses will have to gather direct and indirect emissions from their suppliers.

CBAM’s primary goal is to prevent “carbon leakage.” This occurs when:

• Non-EU products gain competitive advantages by not paying a carbon price
  
  
• EU production decreases or relocates to countries without a carbon pricing scheme

This phenomenon works against the EU’s climate targets, potentially increasing overall emissions rather than reducing them.

To counter this, CBAM aims to equalize the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS), and for imported goods.

When does CBAM go into effect?

CBAM is already in effect. It’s in the first of its two implementation phases:

1. Transitional phase: October 1, 2023 – December 31, 2025
   
   
   • Quarterly reporting required
   • No financial adjustments for embedded emissions, but penalties may be imposed for non-compliance
     
     
2. Definitive phase: From January 1, 2026
   
   
   • Verification requirements come into force
   • Gradual phase-in of CBAM obligations as free allocation under EU ETS is phased out
   • By 2034, 100% of embedded emissions of CBAM goods will be covered

What needs to be reported per EU CBAM?

Under CBAM, in-scope businesses will need to report on the embedded emissions in the goods they import into the EU. 

Embedded emissions refer to the total greenhouse gasses released during the production of these goods, including emissions from energy use and manufacturing processes.

CBAM reporting requirements will be implemented in phases, starting with a select group of carbon-intensive sectors and gradually expanding in scope. The reporting begins in the transitional phase, adds additional requirements in the definitive phase, and is expected to broaden in coverage by 2030.

The table below contains a simplified breakdown of the requirements as they stand now:

What does CBAM mean for EU-based companies?

CBAM applies to specific product categories imported into the EU. If your company is based in the EU and imports products in one or more of the specified categories, you will have to comply with CBAM.

During the transition phase, CBAM will apply to the following EU imports:

• Iron & steel
• Cement
• Fertilizer
• Aluminum
• Hydrogen
• Electricity

If your business imports more than €150 worth of these products, you will be in scope of CBAM.

The inclusion of organic chemicals and polymers, which would bring many oil and gas products into scope of CBAM, has been postponed until 2026.

By 2030, CBAM’s scope is expected to extend to all product groups covered by the EU ETS and to products with a risk of carbon leakage, including:

• Crude petroleum and petroleum products
• Inorganic basic chemicals
• Industrial gasses
• Synthetic rubber
• Non-ferrous metals

Are non-EU companies affected by CBAM?

The EU CBAM will directly impact companies that are exporting CBAM-specific products to customers in EU member states.

These non-EU producers must provide data on the embedded emissions of their products if they:

• Produce components or materials used in CBAM-regulated goods, who may need to provide emissions data to their EU customers
  
• Sell products to traders who then sell to the EU, who may be asked for emissions information by EU importers

If your business meets either or both of these conditions, you should begin calculating your carbon emissions so you can provide the information when asked. 

Penalties for non-compliance with CBAM

Failure to comply with CBAM reporting requirements will result in penalties. The severity of the penalty depends on the phase of implementation:

• Transitional phase: Fines of up to €50 per ton of CO2
  
• Definitive phase: Fines will be linked to the weekly average carbon price in the EU ETS (currently about €85 per ton CO2)

How to comply with CBAM: a six-step plan

1. Determine which of your products fall under CBAM’s scope
   • Review the affected sectors and products, which can be found on the EU’s Taxation & Customs site.
     
2. Engage with your supply chain
   • Communicate with your non-EU suppliers about CBAM requirements and work with them to obtain accurate emissions data for your imports. Consider seeking tools to simplify and accelerate your supplier engagement work, such as Normative’s carbon accounting platform, which has a suite of value chain engagement features.
     
3. Set up systems to monitor and calculate embedded emissions in your products
   • Implement a robust emissions calculation system. Gather data on energy consumption, production processes, and supply chain emissions.
     
4. During the transitional phase: prepare your quarterly reports
   • Set up internal processes to collect and compile required data. Ensure that you can report on:
     • Total quantity of each type of goods
     • Actual total embedded emissions
     • Total indirect emissions
     • Carbon price paid in the country of origin (if any)
       
5. During the definitive phase: purchase CBAM certificates
   • When the definitive phase begins in 2026, your business will be required to purchase certificates proportional to the amount of embedded emissions. You will need to budget for the potential costs.
     
6. Stay informed about updates to CBAM regulations and requirements
   As CBAM is still developing, make sure to monitor official EU communications about the legislation and regularly review and update your compliance strategy. You can also consider joining industry associations or working groups focused on CBAM

By following these steps, your business can work towards CBAM compliance, minimizing risks and preparing for the financial implications of the mechanism.

Remember, the specific requirements may vary based on your industry and the nature of your imports, so it’s crucial to seek expert advice when necessary.