In today’s world, climate concerns dominate policy and discussions about the future of our planet. One of the key instruments currently under discussion in the context of taking action against climate change is the Carbon Border Adjustment Mechanism (CBAM). This mechanism is designed to prevent the risk of carbon leakage. Also, by encouraging the reduction of emissions by operators in third countries, it will reduce global carbon emissions.
What is the Carbon Border Adjustment Mechanism?
The Carbon Border Adjustment Mechanism is a European regulation and it is part of the Fit for 55 package, which aims to reduce greenhouse gas emissions by at least 55% before 2030. CBAM supplements the EU Emissions Trading System (ETS). The EU currently has a system in place where producers in the EU must purchase emission allowances for the CO2 emissions of their products: the EU emissions trading system. With the CBAM price correction, producers no longer experience a competitive advantage when importing from third countries where the costs of CO2 emissions are lower.
Why is it necessary?
One of the biggest challenges in addressing climate change is that greenhouse gas emissions are often shifted to regions or countries with less strict regulations. This is known as carbon leakage. Carbon leakage occurs when companies based in the EU move carbon-intensive production to countries where less strict climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports. The CBAM would address this issue by ensuring that companies producing goods for the European market, regardless of where they are located, have a similar incentive to reduce their emissions. This would not only be fair to companies already investing in low-carbon technologies, but it would also be an incentive for other countries and regions to implement similar measures.
How does it work in practice?
The Carbon Border Adjustment Mechanism applies to importers of CBAM goods. These are goods in the categories: iron and steel, cement, fertilizers, aluminium, electricity and hydrogen. The complete list of commodity codes can be found in Annex I of the European regulation.
The implementation of the CBAM consists of two phases:
- The transition phase from the 1st of October 2023 until the 31st of December 2025
- The general entry into force from the 1st of January 2026
Since October 1, 2023, there is a reporting obligation for importing CBAM goods. As an importer, a report needs to be submitted to the European Commission within 1 month after the end of each quarter. The report includes the amount of CBAM goods you have imported and the amount of CO2 emitted during the production of those goods. The transition phase of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
After the 1st of January 2026, if importers want to import CBAM goods, they must be admitted as CBAM declarants. In addition, importers of CBAM goods must purchase CO2 certificates to correct the CO2 emitted during the production of the imported goods. If you can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.
In conclusion, the Carbon Border Adjustment Mechanism (CBAM) stands as a key instrument in the global fight against climate change, ensuring fairness in international trade and reducing global carbon emissions.
Do you want to know more about the CBAM and what the consequences are for your business activities? Don’t hesitate to contact us and together, let’s make sustainability work!
