On October 1, 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) entered its transitional phase, marking it as the world’s first carbon border adjustment mechanism. The CBAM aims to put a fair price on the carbon emitted while producing carbon-intensive goods. On January 31, 2024, importers must report the direct and indirect carbon emissions measured between October and December 2023 to the CBAM Transitional Registry. The CBAM is being implemented in conjunction with the phase-out of free allowances for carbon emissions currently granted by the EU’s Emissions Trading System (ETS) to decarbonize the EU’s industry fully.
The CBAM aims to mitigate concerns about carbon leakage in which companies based in the EU decide to produce carbon-intensive products abroad where less intensive climate policies and emissions are less monitored and regulated. The policy makes sure that importers pay the price for the carbon emissions that the production of their imports caused so that the carbon price of imports equals the carbon price of EU domestic production.
As part of the CBAM, EU importers of goods covered by the CBAM will be required to register with national authorities. Importers will be allowed to buy CBAM certificates, which will determine the average weekly auction price of EU ETS allowances. Importers will then declare the emissions embedded in their imports for the previous year at the beginning of each year and report the corresponding certificate numbers. However, if importers can prove that a carbon price has already been paid during the production of an imported good, this price can be deducted.
In its first implementation stage, the CBAM is focused on carbon-heavy imports such as iron, cement, aluminum, electricity, hydrogen, and fertilizers. During this stage, importers can report their embedded emissions using the EU method, reporting based on an equivalent method or reporting based on default reference values. By 2025, all importers will be required to report their emissions using the EU method, and estimates will only be able to be used for complex goods if estimations are less than 20% of the total embedded emissions. In order to assist companies with performing these novel calculations and to streamline the reporting of embedded emissions, the EU has developed digital tools, training materials, and tutorials to assist importers.
By 2026, the EU will have the goal of the CBAM entering fully into force. In 2026, importers must declare the number of goods imported into the EU in the previous year and their embedded greenhouse gas emissions. Importers will then have to hand over the number of CBAM certificates corresponding to their embedded emissions.
While the EU’s CBAM policy is currently in its early stages of implementation, it is projected to have a notable impact on EU emissions. The policy will deter EU producers from deciding to produce their products in a different country where they can emit more carbon without paying the price, which will have a marked impact on emissions produced by EU and international-based companies. The CBAM is also notable in that it is one of the world’s first policies attempting to grapple with deterring the production of emissions in areas exterior to a country/entity’s borders. The EU’s CBAM Transitional Registry will congregate the embedded emissions data provided by importers. It will be a straightforward tool that the EU can use to assess the policy’s impact, as the EU can analyze how much carbon emissions decrease when importers are forced to pay a greater price for their emissions. As the policy continues to expand in the years to come to a greater number of imported goods, it is also projected to decrease carbon emissions by a larger amount and aid the EU in its goal of achieving net-zero carbon emissions by 2050.
This post was submitted by Climate Scorecard EU author Brittany Demogenes.
Learn More Resources:
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#why-cbam
https://www.wolterskluwer.com/en/expert-insights/european-union-climate-change-regulations
Image Courtesy of: https://www.europeanfiles.eu/climate/carbon-border-adjustment-mechanism-cbam-an-effective-climate-measure