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Key points:
Purpose
To impose a carbon tariff on carbon-intensive products imported to the EU to prevent carbon leakage and stimulate decarbonisation
Impacted products
Includes steel, cement, some electricity, aluminium, fertilisers, hydrogen, iron, and potentially downstream products
Timeline
Entered into force on 17 May 2023 with a transitional phase from October 2023 to the end of 2025
What is the Carbon Border Adjustment Mechanism (CBAM)?
The Carbon Border Adjustment Mechanism (CBAM) is a carbon tariff introduced by the European Union that puts a price on carbon-intensive goods imported into the EU. Its primary goal is to address carbon leakage, which occurs when companies transfer production to countries with lower emissions standards, often leading to an overall increase in emissions.
Under CBAM, EU importers will be required to purchase CBAM certificates, the prices of which correspond to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules. The price of CBAM certificates is linked to the price of EU allowances under the European Union Emissions Trading System (EU ETS).
The mechanism is being implemented in phases, with the first stage focused on high-emitting sectors such as cement, fertilisers, iron and steel, aluminium, hydrogen, and electricity. After this initial trial period, CBAM will gradually expand to include more sectors until it comes into full force from 1 January, 2026.
CBAM is designed to create a level playing field, incentivise international partners to take climate action, and hasten decarbonisation by making companies reduce emissions. It is also aligned with the phase-out of free allowances in the EU ETS.
CBAM timeline
October 2023
CBAM implementation begins requiring importers of regulated products to collect data for submission in 2024 regarding the embodied emissions of products.
31 January 2024
The first quarterly report of embedded product emissions is due. The European Commission has produced guidance for reporting embodied emissions and a template report.
1 January 2025
The EU method is required for calculating embedded product emissions.
2026
Importers will need to declare the quantity of goods imported into the EU in the preceding year, and the embedded greenhouse gas emissions. They will surrender the corresponding number of CBAM certificates.
2026-2035
Phasing out of free allowances under the EU ETS will take place in parallel with the phasing in of CBAM certificates.
What products are impacted by the CBAM?
CBAM currently covers the import of the following products into the EU:
- Iron and steel: Steel plates, pipes, iron bars.
- Aluminium: Aluminium sheets, bars and profiles.
- Cement: Portland cement, cement clinkers.
- Hydrogen: Hydrogen gas.
- Fertilisers: Mineral and chemical fertilisers.
- Electricity: Electricity generated from fossil fuels.
The initial products covered by CBAM have been chosen due to their carbon-intensive production methods and perceived risk of carbon leakage. However, the scope is likely to expand further as the transition period acts as a pilot phase. Currently, the proposed CBAM sectors only represent 50% of the emissions covered by the EU's ETS.
Businesses that import affected products into the EU should carefully review the implications of CBAM on their operations. Even for businesses importing goods not currently covered by CBAM, it is recommended to closely monitor developments, as the mechanism's scope may be broadened in the future.
The transition period serves as a pilot to assess the effectiveness and potential expansion of CBAM. As the EU aims to reduce carbon emissions and level the playing field for domestic manufacturers, the range of products subject to CBAM is expected to grow over time, potentially impacting a wider range of industries and supply chains.
What is the impact of CBAM on businesses?
Importers must obtain data on embedded emissions for EU-bound goods to comply with reporting. Exporters of CBAM products to the EU need to disclose emissions data, potentially increasing costs and disrupting supply chains. Post-transition, EU importers of CBAM goods requiring carbon adjustments must buy CBAM certificates, raising product costs throughout the supply chain.
What actions should businesses impacted by CBAM take now?
Carry out an initial impact assessment
- Identify which of your products and key upstream suppliers will be covered by CBAM regulations initially and in future expansions.
- Analyse import volumes and sourcing locations for those covered products to gauge the potential financial impact.
- Review your supply chains to determine embedded emissions that will need to be reported.
Establish processes for emissions data collection
- Set up a framework and processes for collecting emissions data related to the production of imported goods covered by CBAM.
- This includes direct emissions from fuel combustion, waste gases, processes, as well as indirect emissions from electricity consumption.
- Engage with suppliers to ensure they can provide the required emissions data.
Prepare for CBAM reporting and compliance
- Establish clear internal processes for reporting embedded emissions data to authorities as per CBAM requirements.
Evaluate long-term strategies
- Monitor regulatory changes, as CBAM's scope is expected to expand to more products by 2030.
- Explore opportunities to decarbonise supply chains and increase low-carbon sourcing to remain competitive.
Get CBAM ready with RSM
The EU’s CBAM represents a significant shift in the global trade landscape, with far-reaching implications for businesses operating in or exporting to the European market. RSM possesses deep expertise and a comprehensive understanding of the CBAM's complexities and its potential impact on supply chains and operations.
Moreover, our global network of professionals enables us to provide localised insights and tailored solutions that address the specific challenges faced by businesses in different markets. This collaborative approach ensures that our clients receive customised strategies that not only facilitate CBAM compliance but also position them for long-term success in the evolving carbon-conscious economy.
We are committed to staying at the forefront of the ESG landscape, continuously enhancing our capabilities, and empowering our clients with the knowledge and tools they need to navigate this complex landscape with confidence.
Frequently Asked Questions
The EU's Carbon Border Adjustment Mechanism (CBAM) is a policy tool designed to prevent carbon leakage and encourage global decarbonization efforts. It works by imposing a carbon price on imports of certain carbon-intensive goods like cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen entering the EU market.
The initial product scope covers major carbon-intensive industrial sectors, but the CBAM may be expanded to include more sectors and products in the future as the mechanism evolves.
CBAM currently covers the import of the following products into the EU:
- • Iron and steel: Steel plates, pipes, iron bars.
- • Aluminium: Aluminium sheets, bars and profiles.
- • Cement: Portland cement, cement clinkers.
- • Hydrogen: Hydrogen gas.
- • Fertilisers: Mineral and chemical fertilisers.
- • Electricity: Electricity generated from fossil fuels.
CBAM will have a significant impact on businesses outside the EU that export carbon-intensive goods like cement, iron, steel, aluminium, fertilisers, and electricity to the EU market. CBAM creates financial, administrative, and competitive pressures for non-EU businesses exporting carbon-intensive goods to the EU, incentivising them to decarbonize their operations or potentially shift production.
Companies falling under CSRD must disclose material ESG impacts, risks, and opportunities. Additionally, they need to reveal information about their upstream and downstream value chains concerning ESG aspects.
The current transitional phase of CBAM is in effect from 1 October, 2023, until 31 December , 2025. During this period, importers are required to report the embedded emissions associated with their imports of covered goods, without the obligation to purchase CBAM certificates or pay any fees. This transitional phase allows companies to familiarise themselves with the reporting requirements and prepare their systems for the upcoming definitive regime.
Starting January 1, 2026, CBAM will enter its definitive regime, where importers must purchase CBAM certificates corresponding to the embedded emissions in their imports. The price of these certificates will be based on the weekly average auction price of EU Emissions Trading System (ETS) allowances, ensuring alignment with the EU's internal carbon pricing mechanism.
CBAM extends the EU's carbon pricing policy to imports while the ETS continues to cover domestic production. This aims to create a level playing field by ensuring both domestic and imported carbon-intensive goods face a similar carbon price, preventing carbon leakage risks as free allowances are phased out under the ETS.
While initially focusing on imports from non-ETS countries, the CBAM framework aims to be WTO-compliant and facilitate integration with similar carbon pricing schemes in partner countries over time to create a level playing field globally.
Penalties for non-compliance or misreporting are calculated based on the quantity of unreported or incorrectly reported embedded emissions in imported goods. Specifically:
- • For each ton of embedded emissions that goes unreported or is inaccurately reported, companies may face penalties ranging from €10 to €50.
- • The exact penalty amount within this range is determined by the respective EU member state where the non-compliance or misreporting occurs.
Organisations should take a systematic approach; engage the supply chain, streamline data processes, and understand reporting requirements. Using this approach, companies can position themselves for successful CBAM compliance while potentially leveraging it as a strategic opportunity for decarbonisation
By creating financial consequences for carbon-intensive imports while rewarding low-emission production, CBAM aims to accelerate the transition towards a more sustainable and low-carbon global economy, driving businesses to integrate environmental considerations into their core strategies and operations.
