.jpeg?rev=a600cdafcefc485fa410fceb6182fd7a&la=en&h=800&w=1600&hash=A6AE4B2DCB4BF70FEE820F39B5C6A63F)
Transitioning Into the European Carbon Border Adjustment Mechanism
As part of the Fit for 55 Package of the EU Green Deal, the EU Carbon Border Adjustment Mechanism("CBAM"), adopted through Regulation (EU) 2023/956 of May 10, 2023, is considered by the EU institutions as a key tool to become the world's first climate-neutral continent at the latest by 2050. The EU CBAM aims at preventing "carbon leakage" (i.e., relocation of carbon-intensive production to countries with less stringent carbon pricing regulations) and sets up a level playing field between EU producers and non-EU producers. This objective will be achieved by ensuring equivalent carbon pricing for certain imported and domestic goods through the application of a levy on the greenhouse gas ("GHG") emissions embedded in certain imported goods. It will take into account the charge imposed on equivalent domestic goods subject to the EU Emission Trading System ("EU ETS"), as well as any mandatory carbon prices applicable in the exporting country.
The CBAM is intended to be phased in progressively. In parallel, the applicable-free allocation system of EU ETS allowances will be phased out to avoid offering a more favorable treatment for EU goods compared to "CBAM goods" imported into the EU.
In the first phase, the CBAM will apply to carbon-intensive products with a high "carbon leakage" risk: iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen. It will gradually extend to include by 2030 all imported products similar to those currently subject to the EU ETS.
From October 1, 2023, until December 31, 2025 (the transitional period), importers of CBAM goods into the EU are required to submit quarterly reports on a transitional registry, with a first report due by January 31, 2024, to cover Q4 2023. The quarterly reports must detail, in particular:
- Quantities of CBAM goods (net weight) imported, specified per country of origin and per production site;
- The embedded direct and indirect GHG emissions released during the production process; and
- The carbon price paid in the country of origin (if any).
At this stage, importers can choose between three different methods to calculate the embedded emissions. However, starting in January 2025, the only acceptable method will be the EU method based on a methodology detailed in Annex III of Delegated Regulation 2023/1773 of August 17, 2023.
Starting in January 2026, importers will need to have the status of "authorized declarant" pursuant to an authorization obtained from one of the EU Member States to be entitled to import CBAM goods into the EU.
In order to make the transition period and the expanded execution phases of CBAM as smooth and as least disruptive as possible, importers of products subject to CBAM need to prepare for the forthcoming changes. Importers may need technical assistance, in particular to set up an embedded emission data collection process and monitor their supply chain, as well as legal assistance to identify whether imported goods fall within the scope of the CBAM, secure contracts both downstream and upstream taking into consideration the CBAM regulation requirements, and prepare the declarant application file.
