Europe’s Carbon Border Adjustment Mechanism (CBAM)

The EU Carbon Border Adjustment Mechanism (CBAM) is a regulation enforced by the European Union (EU) beginning from October 1, 2023. Its purpose is to prevent 'carbon leakage' by applying a levy to certain imported goods from non-EU and non-European Free Trade Association (EFTA) countries.

What is ‘Carbon leakage’?

“Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.”

(Source)

The Carbon Border Adjustment Mechanism (CBAM) is the European Union's (EU) strategy for promoting cleaner industrial production globally. It does this by applying a fair price on the carbon emitted during the production of carbon-intensive goods imported into the EU. The CBAM ensures that the carbon price of imports matches the carbon price of domestic production, effectively confirming that a price has been paid for the embedded carbon emissions generated during production. This approach prevents businesses from offshoring their production to countries with less stringent emission requirements, leveling the playing field and encouraging everyone to decarbonise.

The CBAM will initially apply to imports of certain goods and selected precursors that are carbon-intensive and most significantly at risk of carbon leakage. These goods include cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Further scope extensions will be determined by 2026, with the intention to include all of the EU's Emissions Trading System products by 2030.

During the transitional period, beginning from 1 October 2023, importers of CBAM goods are required to submit quarterly reports covering the quantities of CBAM goods imported in the period, country of origin, production site, and the greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions).

By 1 January 2026, the full scope of the CBAM regulation will be in force. Importers will need to obtain an authorisation to import CBAM goods, declare the quantity of CBAM goods imported into the EU in the preceding year and their embedded greenhouse gas emissions, and surrender CBAM certificates to cover the declared emissions.

Key takeaways for Sumday advisors:

• Other jurisdictions will likely be looking at similar ‘Carbon Border Taxes’ to implement penalties and incentives in the coming year too. UK has already announced they will launch its own CBAM starting from 2027, with the design and delivery of CBAM going through further consultations in 2024. (source)
• Clients who trade on international markets will need help to understand what products will be subjected to these ‘Carbon Border Taxes’, and what emissions data is required. Who are their suppliers and can they provide this information?
• Carbon accounting plays a crucial role in this mechanism. The CBAM reporting requires accurate tracking and reporting of carbon emissions embedded in the imported goods. Understanding and implementing carbon accounting practices will be essential for companies to comply with the CBAM regulation, as accurate carbon emissions data will be key to calculating the carbon levy and potentially avoiding penalties. This is where Sumday Advisors can help their clients understand and navigate the requirements. Reach out for a chat if you’re keen to learn more.