On 10th May 2023, the European Parliament and Council established a regulation to prevent carbon-intensive imports from undermining the EU’s climate objectives and to encourage the adoption of cleaner production practices, known as the Carbon Border Adjustment Mechanism (CBAM). CBAM is a big step forward in the EU's commitment to sustainable trade, as businesses and governments worldwide see the need to address climate change.

What is the Carbon Border Adjustment Mechanism (CBAM )?

The Carbon Border Adjustment Mechanism, or CBAM, is a new regulation that puts a price on carbon emissions embedded in goods imported into the EU, and requires affected companies to report and purchase special emission allowances, CBAM certificates, for associated emissions; helping to level the playing field for European businesses and encourages other countries to reduce their emissions.

What is the Scope of CBAM & Who is affected

During the ongoing transitional phase until December 31, 2025, the CBAM introduces financial obligations related to the carbon content of imported goods into the EU. Importers are now subject to CBAM reporting requirements, affecting all EU member states directly without the necessity of individual transposition into national laws.

The regulation specifies certain goods under its scope, including but not limited to aluminum, iron and steel, cement, fertilizer, electricity, and hydrogen. As part of future policy considerations, the scope of CBAM is expected to expand to encompass various energy products, broadening its impact beyond the initially listed categories.

Importers must make a "CBAM declaration" with the quantity of goods, embedded emissions, and certificates for payment of the carbon import tax.

  • Annex I: the goods that attract the import tax, including cement, electricity, fertilizers (such as nitric acid, ammonia, potassium), iron and steel (including tanks, drums, containers), and aluminium.
  • Annex II: CBAM does not apply to the four non-EU member states that are included in the European Economic Area, namely Iceland, Liechtenstein, Norway and Switzerland.
  • Annex III: the methods for calculating embedded greenhouse gas emissions. Exporters required to report their emissions and purchase CBAM certificates, which will increase their costs and reduce their profitability.

CBAM Timeline

May 2023 marked the official ratification of CBAM, and reporting periods begin from 1st October 2023. The schedule of declarations follows a regular quarterly cycle. The inaugural report submission is slated for January 31, 2024 in respect of goods imported during the fourth quarter of 2023. The last report should be submitted by 31 January 2026 in respect of goods imported during the fourth quarter of 2025.


Important steps to comply with CBAM regulations

Exporters must take many significant procedures to comply with the Carbon Border Adjustment Mechanism (CBAM) regulations:

  1. Product Identification: Determine whether the products fall under CBAM requirements.
  2. Processed Goods Assessment: Evaluate the applicability of CBAM to processed goods resulting from inward processing.
  3. Emissions Information Collection: Gather and calculate embedded emissions data for the covered products.
  4. CBAM Organization Establishment: Consider setting up a dedicated CBAM organization to efficiently manage and report relevant information.
  5. Information Sharing with EU Importers: Ensure that all required information in the specified format is shared promptly with EU importers.
  6. Transitional Phase Priority: During the transitional phase, prioritize accuracy in sharing CBAM-related information with EU importers.
  7. Post-Transitional Phase Priority: After the transitional phase, focus on minimizing the impact of carbon levies, while continuing to adhere to the above steps.

Reporting Obligations During the Transition Period

From October 1, 2023, to December 31, 2025, the Carbon Border Adjustment Mechanism (CBAM) applies with limited obligations for importers or designated indirect customs representatives of affected goods. Full applicability of the regulation begins on January 1, 2026.

Reporting Requirement Applicability

During the transition period, importers or indirect customs representatives dealing with goods covered by Regulation (EU) 2023/956 must report to the EU Commission as per Article 35 of the regulation. Importers are not obligated to report to the German customs administration during this transitional period.

Goods Covered by CBAM:

The product scope covered by CBAM is specified in Annex I to the Regulation, determined by the CN code. CBAM includes greenhouse gases emitted during production, mainly focusing on carbon dioxide, with some processes also covering nitrous oxide and perfluorocarbons. Covered Goods Include:

  • Aluminium, cement, electricity, fertilizers, iron, steel.
  • Pre-products and certain downstream products of iron, steel, and aluminium.
  • Hydrogen and ammonia.

Key Details on CBAM Reporting: Exemptions, Deadline, and Submission Process

  • Exemptions from Reporting Obligation: Certain imports are exempt from the CBAM reporting obligation, including those from EFTA countries and some territories, goods listed in Annex I of Regulation (EU) 2023/956 with a total value not exceeding EUR 150 per consignment, and goods in personal luggage within the EUR 150 value limit.

  • Deadline for CBAM Report Submission: CBAM reports for goods imported during a quarter must be submitted to the EU Commission no later than one month after the quarter's end. The first CBAM report is due for the fourth quarter of 2023.

  • Submission Process and Access: CBAM reports are submitted via the provisional CBAM register, and access is granted by the national competent authority. The competent authority for Germany is yet to be determined.

Contents of CBAM Report: Information in the CBAM report includes:

  1. Total quantity of each type of goods in megawatt hours or tonnes, broken down by facilities in the country of origin.
  2. Actual total grey emissions in tonnes of CO2 emissions per unit (megawatt hour or tonne) according to Annex IV.
  3. Total indirect emissions calculated in accordance with the implementing act.
  4. CO2 price to be paid in the country of origin, considering any available export refund or compensation.

International Perspective of CBAM:

The CBAM's influence extends beyond EU borders:

  • Global Trade Dynamics: Export-oriented nations, particularly those with carbon-intensive industries, may experience increased costs, reshaping the dynamics of global trade.
  • Diplomatic Negotiations: Diplomatic conversations between the EU and its trading partners are likely to take place as countries seek mutually beneficial solutions.
  • Global Policy Influence: CBAM's success may set a precedent, encouraging other nations to adopt similar measures, fostering a global shift toward sustainable production practices.
  • Competitive Realignment: Non-EU countries may find it challenging to sustain competitiveness in the EU market without aligning their carbon pricing policies, prompting a reassessment of global economic policies.

Conclusion :

CBAM is the EU's way of dealing with products that harm the environment. It puts a cost on pollution in goods coming into the EU. This helps EU companies that follow cleaner practices. Businesses need to get ready for CBAM by collecting data and following new rules. CBAM isn't just for the EU – it affects global trade, leads to talks between countries, and might encourage others worldwide to be more eco-friendly. The key to CBAM's success is everyone working together for a greener future."

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