The EU is stepping up its sustainability regulatory game with the introduction of the Carbon Border Adjustment Mechanism (CBAM).
As the EU tightens its environmental standards, CBAM emerges as a key tool to ensure fair competition while combating carbon leakage.
With the transitional period already underway, it's time to grasp the ins and outs of CBAM's impact on global trade and sustainability with this EU CBAM guide.
What is CBAM?
The EU’s Carbon Border Adjustment Mechanism (CBAM) is designed to establish a fair price for the carbon emitted during the production of carbon-intensive goods entering the EU, while also promoting cleaner industrial practices globally.
With the CBAM, importers have to pay a fee based on the carbon emissions created when making certain goods. This makes sure that imported products follow the same carbon pricing rules as those made within the EU.
It keeps things fair and stops any unfair advantages caused by different carbon pricing systems. This parity in carbon pricing between imports and domestic production helps uphold the EU's climate objectives without compromising its competitiveness.
Importantly, the CBAM is crafted to comply with WTO rules, ensuring its compatibility with international trade standards.
How Does CBAM Work?
The CBAM operates in accordance with the EU's international obligations, including compliance with WTO regulations, and closely mirrors the structure of the EU Emissions Trading System (ETS).
Here’s a Breakdown of How it Operates
CBAM evaluates the actual carbon emissions embedded within goods imported into the EU using a methodology consistent with the reporting standards of the EU ETS for similar goods produced domestically.
Once the CBAM becomes fully operational in 2026, EU importers will be required to purchase CBAM certificates reflecting the carbon price that would have been paid had the goods been manufactured in compliance with EU carbon pricing regulations.
Conversely, if a non-EU producer has already paid a carbon price in a third country for the embedded emissions associated with the production of imported goods, this corresponding cost can be deducted entirely from the CBAM obligation.
End: The future of global trade is increasingly intertwined with environmental regulations. As the EU takes a pioneering role with CBAM, other countries are likely to follow suit.
CBAM creates a level playing field by ensuring that the carbon footprint of imported goods is accounted for, and failure to comply could result in significant penalties or even blocked market access.
Understanding CBAM's intricacies is no longer just an advantage, it's becoming essential for businesses involved in international trade.
CBAM working phases
How Does CBAM Align With EU ETS?
The EU's CBAM and Emissions Trading System (ETS) are powerful tools working together to combat climate change. The established ETS sets a limit (cap) on greenhouse gas emissions from power generation and major industrial facilities within the EU. Companies participating in the ETS need allowances to cover their emissions, which they can purchase or receive through allocation schemes.
The newer CBAM mechanism focuses on imported goods. It operates through a system of certificates reflecting the carbon footprint embedded in these products. While they differ in structure (CBAM isn't a cap-and-trade system like ETS), both mechanisms establish a carbon price. CBAM certificate prices are aligned with the price of ETS allowances, ensuring a level playing field for EU producers.
The CBAM isn't just an add-on to the ETS. As the EU gradually reduces the number of free allowances available under the ETS, the CBAM plays a complementary role. This twin-track approach incentivizes companies to further reduce their emissions, both domestically and within their global supply chains.
Ultimately, both CBAM and the EU ETS share the same objective: significant and sustained reductions in carbon emissions. The ETS addresses emissions within the EU, while CBAM encourages cleaner production practices for imported goods. This coordinated effort strengthens the EU's commitment to achieving its ambitious climate goals.
CBAM and EU ETS
CBAM Rollout Timeline
The CBAM rollout has entered its initial phase, with a 27-month transition period beginning on October 1, 2023. While full implementation isn't until 2 more years, the CBAM process is already underway. From October 1, 2023, exporters are required to report the carbon content of certain goods.
October 1, 2023: It will be a 27 month transition period which started from October 1, 2023. Exporters won't need to pay any tax but share details of the carbon content of steel and aluminum with EU importers.
January 2026: Exporters will start paying carbon border tax on aluminum, steel, and other covered products.
2026 - 2034: СВАМ will be extended from 2026 to 2034, where new products will be gradually brought under the CBT ambit.
2034 Onwards: Starting in 2034, all the goods and materials imported into the EU will be taxed under the СВАМ.
Industries and Goods Impacted by CBAM:
The CBAM focuses on specific industries with a high carbon footprint. These include:
Cement
Electricity
Iron & Steel
Aluminum
Fertilizer
Hydrogen
Sectors covered under CBAM
The CBAM Regulation applies to goods classified under
i. CN codes (Combined Nomenclature), which extend the
ii. Harmonized System (HS) code used for international trade.
Annex I of the CBAM Regulation lists all goods subject to reporting of embedded emissions, known as 'CBAM goods.'
The CBAM primarily targets raw materials and intermediate goods, but it also extends its coverage to certain finished or downstream products, such as fasteners classified under CN code 7318 XX XX
Throughout the transitional period, CBAM reporting requirements do not extend to returned goods, as outlined in Article 203 of the Union Customs Code.
Consequently, the embedded emissions associated with these goods are exempt from inclusion in the CBAM report.
Here's a key point to remember: Returned goods are currently exempt from CBAM reporting.
For businesses involved in exporting to the EU, understanding the CBAM timeline and impacted sectors is crucial. The transition period provides an opportunity to prepare for future carbon border taxes and ensure compliance.
The EU's CBAM represents a significant shift in global trade, placing environmental responsibility at the forefront. As the system progresses from its initial phase focusing on reporting to full implementation with carbon border taxes, businesses worldwide will need to adapt.
Understanding the mechanics, timeline, and impacted sectors allows you to proactively assess your business's needs and explore strategies for compliance.
Here are some key takeaways:
CBAM aims for a level playing field: It ensures imported goods are priced competitively with those produced domestically under the EU's carbon pricing regulations.
CBAM and the EU ETS work in tandem: Both systems promote emission reductions, with CBAM complementing the established ETS by addressing the carbon footprint of imported goods.
The transition period offers an opportunity: Businesses can use this time to evaluate their supply chains, identify potential carbon hotspots, and explore emission reduction strategies.
By staying informed and taking proactive steps, businesses can navigate CBAM successfully and contribute to a more sustainable future
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