CBAM: the European “environmental duty” is coming

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The CBAM will enter into force in its transitional phase as of 1 October 2023

On 10 May 2023 the Council of the European Union and European Parliament signed the regulation implementing the EU Carbon Border Adjustment Mechanism (“CBAM”), one of the most important initiatives part of the Fit for 55 Package, the main tool to cut emissions by at least 55% by 2030 and fulfill climate neutrality in the EU by 2050.

The new CBAM Regulation is targeted at imports of products in carbon-intensive industries. The objective of CBAM is to prevent dilution or offset or EU carbon reduction efforts by increasing emissions outside its borders through the relocation of production to countries that have less ambitious policies to fight climate change (so-called “carbon leakage”).

New compliance obligations for EU importers

A transitional period for CBAM will begin 1 October 2023 and extend through 2025, during which time quarterly emissions reporting will be required.  Affected businesses will need to get ready to comply with new compliance and reporting requirements starting later this year and begin to assess the medium- to long-term process and cost implications.

The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.

During the transition period, only direct emissions will be covered, with indirect emissions following further down the line.

At the end of the transition period, the Commission will assess whether other goods should be included, such as organic chemicals and polymers. By 2030, the goal is for CBAM to include all goods which are also covered by the EU ETS. The Commission will also look at the possibility of including more products made from the goods covered by CBAM.

EU importers: reporting to the European Commission during transition periods and obligation to purchase certificates from 2026

Between 1 October 2023 and 31 December 2025, transitional provisions will apply. Importers (customs declarants, indirect representatives) will be required to quarterly report embedded emissions in goods imported during that quarter of the calendar year, detailing the quantity of CBAM goods imported, the direct and indirect emissions as well as any carbon price effectively paid in a third country.

After January 2026, EU importers will have to purchase the certificates corresponding to the emissions embedded in goods imported.

Emissions are based on default or actual demonstrated emissions, whichever is lower.

Notably, from 1 January 2026, importers must have “authorized CBAM declarant” status to qualify for the import of in-scope goods.

By 31 May each year, each authorized declarant will have to submit a CBAM declaration for its imports of basic materials in the previous calendar year. For each type of basic material imported, the CBAM declaration must specify:

  • the total quantity imported
  • the total embedded emissions
  • the number of CBAM certificates corresponding to the total embedded emissions in the basic material imported less any carbon price paid in a country of origin

Authorized declarants failing to surrender the required number of CBAM certificates when submitting their CBAM declaration by 31 May will be liable for a penalty.

 

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