The European Union Carbon Border Adjustment Mechanism (CBAM) entered a transitional period starting from October 1, 2023. As the deadline for the first reporting period approaches, declarants are required to provide carbon emission-related data for CBAM products exported in the fourth quarter of 2023 by January 31, 2024. So, what exactly is CBAM? How is CBAM taxation calculated? What are the implementation timeline and control requirements of CBAM? Which businesses are required to report and submit CBAM reports? Are the accounting standards for CBAM the same as the commonly used carbon inventory and product carbon footprint standards for businesses? This article will address these questions one by one, and further assistance for CBAM reporting to facilitate businesses in international trade will be provided in subsequent articles.
01 What is CBAM?
CBAM, commonly known as "carbon border tax," is a new policy implemented by the European Union in October 2023. It involves levying taxes on the carbon emissions of certain imported goods. The mechanism aims to prevent the risk of "carbon leakage," eliminating the carbon emission gap between imported goods and those produced within the EU, thereby promoting global emission reduction.
At its core, CBAM establishes a virtual carbon pricing mechanism for products imported into the EU, effectively increasing tariff costs for products exported to Europe. For products covered by CBAM, if the carbon pricing at the production site is lower than the EU carbon price, upon entry into the EU customs territory, importers are required to purchase CBAM certificates to compensate for the difference (if any).
Carbon leakage refers to the practice where businesses transfer carbon emissions from regions with stringent emission regulations (such as the European Union) to areas with less stringent climate-related regulations (such as non-developed countries in Africa). While this may reduce the carbon emission costs for the individual company, it does not contribute to a global reduction in overall carbon emissions. In fact, it may even lead to a loss of motivation for carbon reduction due to lax policies, thereby hindering global climate governance efforts.
02 The timeline and control requirements for CBAM operation
In July 2021, the European Commission unveiled the legislative proposal for CBAM. The legislation officially came into effect on May 17, 2023. The transitional period commenced on October 1, 2023, encompassing industries such as cement, aluminum, fertilizers, iron and steel, hydrogen, and electricity. On January 1, 2026, CBAM entered the implementation phase. Starting from January 1, 2035, CBAM transitioned into its formal implementation stage, and with the cessation of EU's free carbon allowances, businesses are required to fully pay the corresponding carbon emission costs.
From 2023 to 2025, the European Union will implement a pilot program for CBAM, testing and refining the mechanism
Timeline | Requirements |
|---|---|
2023.10.1- 2025.12.31 (transitional period) | Scope: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. （The first report will only have to be submitted by the end of January 2024） |
One of the objectives during the transitional period is to collect data for further specifying the monitoring, reporting, and verification methods for carbon emissions post-transition. | |
From 2026 to 2034, CBAM will gradually expand its scope, encompassing more industries and countries
Timeline | Requirements |
|---|---|
2026.1.1-2034.12.31 (implementation period) | Scope: Cement, Steel, Aluminum, Fertilizer, Electricity, and Hydrogen, as well as potentially expanding industries. Businesses are obligated to fulfill reporting requirements and remit carbon taxes. (The payment involves submitting CBAM certificates, with certificate prices calculated based on the weekly average auction price of EU ETS quotas.) |
During the implementation period, the advancement of CBAM will align with the gradual phasing out of free allowances in the EU ETS. This means that the European Union will cease issuing free carbon allowances after the year 2034. | |
After 2035, CBAM will be fully implemented and strengthened
Timeline | Requirements |
|---|---|
2035.1.1 (formal implementation period) | With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors. And the free carbon allowances under EU ETS the will be gradually phased out. |
EU ETS: The EU Emissions Trading System (EU ETS) is the European carbon emissions trading system, comparable to the carbon emissions trading system in China. Established on January 1, 2005, in accordance with Directive 2003/87/EC of the European Union, its purpose is to internalize environmental costs. By establishing a market for emission allowances (EUAs), it aims to minimize the operating costs of businesses while ensuring climate and environmental protection. The EU ETS operates on the principle of cap and trade: eligible businesses on the emissions limitation list receive EUAs either for free based on specific criteria or through paid auctions. Businesses with actual emissions below their allocated quotas can sell surplus carbon allowances on the carbon market. Conversely, businesses exceeding their quotas must purchase additional EUAs or face severe penalties. The system functions to encourage businesses to progressively reduce carbon emissions and contribute to climate change mitigation.
03 Questions and Challenges in Business Reporting?
For companies exporting to the European Union, there are several common questions that arise during the process of addressing CBAM reporting.
Whether Companies Need to Report CBAM
Firstly, determine whether the industry to which the company belongs is among or related to the six industries covered during the CBAM transitional period: cement, steel, aluminum, fertilizers, electricity, and hydrogen. Companies not falling within these six industries are not required to declare. However, CBAM indicates that its scope of collection will further expand, and carbon-emitting industry enterprises should continue to stay informed.
Secondly, clarify whether the exported products belong to the product categories covered during the CBAM transitional period. The current list of products covered by CBAM reporting and the types of greenhouse gases to be reported (CO2, N2O, and PFCs) are shown in the figure below. If the products belong to the listed categories, CBAM reporting is necessary.
Who is responsible for submitting? To whom should the submission be made?
The reporting declarants, authorized by the European Union (importers or indirect customs representatives), are responsible for submitting to the European Union CBAM competent authorities (National Competent Authorities, European Commission, Customs Authorities). They should log in to the CBAM Transitional Registry of the EU during the transitional period and submit the required reports.
CBAM Transitional Registry Interface, Image Source: European Union Official
While the reporting responsibilities for CBAM are typically borne by the authorized declarants, usually importers, these authorized declarants may request carbon emission data from product suppliers, i.e., the exporting companies, to facilitate the report preparation. Therefore, for smooth exports, relevant exporters need to be prepared to provide carbon data and collaborate with the importing parties in the reporting process. If the buyer's market holds a dominant position, the pressure of this task might even be directly transferred to the exporting companies.
Stakeholders in CBAM Reporting, Image Source: European Union Official
What reporting challenges might companies face?
Exporting companies may encounter difficulties in the process of CBAM reporting, including but not limited to challenges such as the difficulty in collecting massive amounts of data, complex production processes, numerous forms, intricate carbon calculations, and high costs and lengthy reporting cycles. The following is the content included in the EU official-provided reporting template, "CBAM communication template for installations“.
“A_InstData” - General information, production processes and purchased precursors
“B_Emlnst” - Installation's emt source stream and emission source level
“C_Emissions and Energy”- installation - level GHG emissions and energy consumption
“D_Processes” - Production level and attributed emissions for SEE calculation
“E_PurchPrec” - Purchased precursors for SEE calculation
“F_Tools”- Tools for facilitating reporting
“Summary_Processes”
“Summary_Products”
“Summary_Communication”
It is important to note that during the CBAM transitional period, declarants who fail to report on time or provide incomplete reports may face fines ranging from 10 to 50 euros per ton of unreported carbon emissions.
Moreover, the accounting standards and methods of CBAM differ from those commonly used in regular carbon inventories and carbon footprint assessments. Therefore, exporting companies need more targeted guidance for CBAM reporting.