The European Commission introduced new regulations that aim to utilize resources to create a competitive, carbon neutral society. Hence the introduction of the initiative for a carbon border adjustment mechanism (CBAM), which essentially taxes imported goods depending on their embodied emissions, for the purpose of counteracting the risks of carbon leakage.
The Gradual Implementation of the CBAM
As of today, the transitional period is planned to last for an approximate duration of two years, namely from October 1st, 2023, till December 31st, 2025. The purpose of the transitional period is to give businesses sufficient time to adjust to the CBAM and to reduce the chances of a disruption to this field of work. This period will entail simplified reporting requirements and will neither require the submission of certificates, nor will it require financial responsibilities.
After the Transitional Period
Starting in 2026, importers will be required to purchase and submit CBAM certificates that align with the carbon emissions embedded in imported goods. The CBAM price is determined by the average EUA auction prices from the week prior. The obligation to submit CBAM certificates is to be introduced gradually, in alignment with the gradual reduction of free allocations to EU producers of those goods. Free allocation is expected to be completely eliminated for the targeted products by the year 2034 and 100% of embedded emissions will be complying with the CBAM obligation.
Data Collection and Reflection
At least one year prior to the end of the transition period, the EU Commission will gather the required data and prepare a report to determine if an expansion to goods beyond the initial list is necessary. Additionally, the data gathered will assist in improving the approaches used to calculate embedded emissions. Further, during the transitional phase, customs authorities ought to notify customs declarants about their duty to report information. This serves a dual purpose of collecting necessary information and raising awareness regarding the potential need to seek authorized CBAM declarant status, when relevant. Customs authorities should convey this information effectively and appropriately to ensure that customs declarants are well-informed about these obligations.
What Should be Included in the Report?
Throughout the transitional period, importers are to provide a CBAM report every quarter of the calendar year to the EU Commission. Meaning that the first quarterly report to be submitted during the transitional period is due by January 2024 and the last quarterly report is due by January 31st, 2026. The CBAM report should contain certain elements about the imported goods. Mainly:
- The overall volume or the amount of each product type, measured in metric tonnes and identified by their CN code.
- The facility or site where the product was manufactured or produced.
- Country of production/origin of the imported products.
- The method or process employed in the production of the product.
- Total embedded direct or indirect emissions as per guidelines in Annex IV of the Official Journal of the European Union: Methods for calculating embedded emissions for the purpose of Article 7.
- The applicable carbon price in the country of origin for the emissions embedded in imported goods, which is not eligible for a rebate or any other type of compensation.
Report Guidelines and Non-Compliance Ramifications
Simplified guidelines will be in place for determining embedded emissions, and verification through an independent verifier will not be required. However, incomplete or inaccurate reports could potentially undergo a correction process and be issued a non-compliance penalty.
For instance, if a declarant fails to submit a CBAM report or if they did not issue a report that follows the required guidelines, they are to receive a fine ranging between 10-50 Euros for each tonne of embedded emission missing from the report.
In case non-compliant reports are not modified within less than six months, greater penalties are to be expected. Declarants are able to modify their reports up to two months after the end of their assigned quarterly due date. Since the beginnings are naturally the most challenging, declarants are allowed to make modifications to their two first CBAM reports till the end of the third quarterly deadline.
The Importance of the Transitional Period
Whether directly or indirectly, many businesses will be affected by the new regulations. This transition allows both parties -the authorities and the receiving end- to navigate their way through the process, to make mistakes and to learn from them, to correct them and to improve from there. Through this period, the impact of the change can be contained and controlled. The functionality of CBAM will be reviewed and practical feedback may result in modification of regulations before introducing and implementing the finalized system.