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Thoughts

Why does the EU CBAM matter and who is responsible?

19th Mar, 2024

The Carbon Border Adjustment Mechanism (CBAM) was implemented on October 1, 2023. It applies to importers of specific carbon-intensive goods and is a pivotal tool in the European Union’s (EU) strategy to combat ‘carbon leakage’. From January 2026, importers will have to buy and submit CBAM certificates. In this blog, we explain the transitional phase and discuss the  current and future obligations for importers under CBAM.

Designed to counter the potential shift of carbon-intensive production outside the EU, CBAM is a significant instrument to reshape the future of international trade and environmental responsibility. Even from its first stages of implementation, it is effecting a wide range of sectors including manufacturing, construction, industrial, agricultural and energy.

The EU’s CBAM explained

The CBAM is a critical element in the EU’s strategy to achieve its ambitious goal of reducing greenhouse gas emissions by at least 55% by 2030. It is being introduced gradually and aligns with the phasing out of free allowances under the EU Emissions Trading System (ETS). Initially covering categories such as cement, aluminium, iron & steel, fertilisers, electricity and hydrogen, CBAM aims to ensure that companies cannot sidestep EU climate policies by relocation production to regions with less stringent environmental regulations.

The EU CBAM regulation has been introduced in two phases: The Transitional Phase (October 2023 – December 2025) and the Definitive Phase (from January 2026).

The Transitional Phase

It will be mandatory for importers to submit their CBAM reports on a quarterly basis. However, the actual purchase of CBAM certificates is deferred until 2026. This phase demands attention to detail, importers will need to request for information from their suppliers outside of the EU for information such as the CN Code, quantity of material, direct and indirect embedded emissions and additional qualifying parameters specific to certain goods. Furthermore, importers should be cautious as Member States are allowed to impose penalties, ranging from 10 to 50 euros per ton of unreported emissions for non-compliance. These penalties increase with time and repeated violations.

Acknowledging that this is the first two years of CBAM reporting, there are some derogations such as that the first report benefits from an extended modification period until July 2024. Importers are encouraged to use this time wisely, ensuring accurate and comprehensive reporting. Similarly, for the first three quarterly reports, importers are able to use default values provided by the commission in cases where they do not have the emissions details to fill out the report.

Read here to see an example of the process an EU importer went through to submit their first report by the 31st January 2024 and the way Gemserv supported them through this process.

The Definitive Period

From January 2026, the Definitive Period kicks in, marking the end of exemptions. Importers must purchase CBAM certificates priced according to weekly ETS allowances.

The UK’s CBAM

The UK’s adoption of CBAM follows a parallel path. The UK has affirmed its commitment to CBAM, setting 2027 as the year of its implementation. The CBAM liability will lie with the importer of the imported product, there will be no purchase or trading of emissions certificates, and the UK will place a carbon price on the most emissions intensive industrial goods. These goods are similar to that of the EU CBAM however, the UK has added a few more categories including ceramics and glass. The UK is now undergoing a consultation phase with the next consultation to be released in 2024.

CBAM is a strong incentive for companies to adopt less carbon-intensive sourcing approaches, fostering sustainable supply chains. The incentive extends beyond compliance, encouraging suppliers to also embrace more environmentally sustainable methods. Both EU and UK based companies are likely to need to review their supply chains, sourcing approaches and sustainability strategies with these international economic drivers for low carbon economy.

Contact Us

Gemserv are a valuable partner in helping navigate the challenges of CBAM. Contact us today to find out why CBAM is important and how we can help you.

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