The European Union has introduced the Carbon Border Adjustment Mechanism (CBAM) as part of its strategy to reduce carbon emissions, targeting imports of carbon-intensive goods. Launched in its transition phase on October 1, 2023, the mechanism will become fully operational in 2026, aiming to encourage more environmentally friendly production globally.

What is CBAM and why is it important?

CBAM is a key EU tool designed to impose a fair carbon cost on imported goods, aligning with the Union’s ambitious climate objectives. The targeted sectors include:

• Cement, iron, steel, aluminum, fertilizers, hydrogen, and electricity.

The mechanism addresses carbon leakage, a phenomenon where production is transferred outside the EU to avoid strict emissions regulations.

How does CBAM work?

CBAM requires importers to purchase carbon certificates equivalent to the carbon emissions associated with imported goods. The price of these certificates aligns with that of the EU ETS (European Union Emissions Trading System) and is calculated based on its weekly average price.

Implementation phases and reporting obligations

Transition Phase (2023–2025):

• Importers report direct and indirect emissions of imported goods quarterly, without the obligation to purchase CBAM certificates.

• First reporting deadline: January 31, 2024 (for Q4, 2023).

• Final quarterly report: December 31, 2025.

Full implementation (2026):

• Importers will report annually and purchase CBAM certificates corresponding to the embedded emissions in goods.

• First annual report deadline: May 31, 2027 (for the year 2026).

Emissions reporting methodologies

During the transition period, companies can use:

1. 1. 1. EU Methodology: Accurate calculation of direct and indirect emissions.
      2. Equivalent Methods: Temporarily accepted until July 31, 2024.
      3. Default Values: Available for quick estimates (restricted to a maximum of 20% for complex goods starting August 2024).

From January 1, 2025, only the EU methodology will be permitted, with minor exceptions for complex goods.

Resources and support for importers

To facilitate compliance, the European Commission has developed:•

• Dedicated IT tools.

• Detailed guidelines.

• Training materials to help companies adapt to reporting requirements.

CBAM timeline: key deadlines

• January 31, 2024: Deadline for the first quarterly report (Q4, 2023).

• April 30, 2024: Deadline for Q1, 2024 report.

• December 31, 2024: Start of the authorization process for import declarations.

• January 1, 2026: CBAM becomes fully operational.

• May 31, 2027: Deadline for the first annual report (for 2026).

CBAM review and extension

By the end of the transition period (December 2025), the mechanism will be reviewed to:

• Assess the efficiency of its implementation.

• Expand to other categories of goods by 2030.

CBAM exemptions

The following are exempt from CBAM:

1. 1. 1. Imports from Norway, Iceland, Switzerland, and Liechtenstein.
      2. Shipments valued at up to €150.
      3. Goods imported by military authorities or NATO.

Penalties for non-compliance

Failure to meet reporting requirements results in penalties of:

• €50/ton of unreported emissions (value adjustable based on the European consumer price index).

Conclusions and recommendations

CBAM is an essential step towards transitioning to a greener economy, offering opportunities for companies adopting sustainable practices. To avoid penalties, companies should:

• Collaborate with suppliers to collect accurate emissions data.

• Integrate emissions monitoring systems into internal processes.

• Seek specialized consultancy to adapt to CBAM regulations.

By complying with and adapting to the new requirements, importers contribute to achieving the EU’s climate goals while maintaining their competitiveness in the European market.