Understanding the EU Carbon Border Adjustment Mechanism or CBAM
CBAM has kicked in on October 2023. Learn what this mechanism is and how it works.
What is CBAM?
The EU Carbon Border Adjustment Mechanism, or CBAM for short, is making waves in the world of global trade, and it's all set to kick in on October 1, 2023. This mechanism is designed to tackle the 'carbon leakage'. That's when companies move their carbon-intensive manufacturing to places with fewer environmental rules. CBAM aims to level the playing field by imposing a carbon price on certain carbon-heavy goods that are imported into the European Union (EU). The idea is to make the cost of carbon emissions from imported goods match the domestic production in the EU.
Important Dates for CBAM
The transition period for CBAM officially starts on October 1, 2023. During this time, businesses importing certain goods will need to get used to the new rules. Right now, that means filing reports every quarter to ensure compliance with the CBAM regulations. But the full implementation, including the CBAM costing mechanism, is slated to take effect on January 1, 2026.
The CBAM costing mechanism is an integral part of this initiative. It corresponds to a gradual phase-out of free emissions allowances for EU businesses under the EU Emissions Trading System (EU ETS). This signifies a fundamental shift in the way carbon emissions are accounted for and managed within the EU.
What's Covered by CBAM
The scope of CBAM covers a range of carbon-intensive products, including:
- Iron and Steel: This includes a wide array of steel products, from raw materials to finished goods.
- Aluminium: Aluminium, known for its energy-intensive production process, is a key focus of CBAM.
- Cement: The cement industry, which contributes significantly to carbon emissions, falls under CBAM's purview.
- Fertilisers: Fertiliser production is often associated with high carbon emissions, making it an essential part of CBAM.
- Electricity: The electricity sector, which relies on various sources, is also subject to CBAM regulations.
- Hydrogen: CBAM includes hydrogen due to its relevance in energy-intensive industries.
To ensure compliance with CBAM, importers of the aforementioned goods or their indirect customs representatives will be required to report specific information. These reporting requirements are designed to calculate and account for the carbon emissions associated with the imported products accurately. It is essential for businesses involved in international trade within the EU to stay informed about these compliance obligations to avoid potential penalties.
The first reporting period will be Q4 2023. Temporarily, three reporting methods will be allowed: full reporting (or the EU method), reporting based on an equivalent method (three options), and reporting based on default reference values (only until July 2024). From January 2025 onwards, only the EU method will be available.
For more detailed information on the EU Carbon Border Adjustment Mechanism and its intricacies, you can refer to the official EU website dedicated to CBAM.
As CBAM unfolds, it's going to have a big impact on global trade, addressing environmental concerns while ensuring a level playing field for businesses operating within the EU.
Have a look at our article about EPR and find out about other green tax policies.