The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a critical element of the ambitious Fit for 55 package aimed at reducing the bloc's greenhouse gas emissions by 55% by 2030. Approved provisionally in December 2022, the CBAM is designed to ensure a level playing field in international trade and to prevent ‘carbon leakage,’ which occurs when companies move production to countries with less stringent emissions regulations. This guide provides an overview of the CBAM and its implications for importers and businesses.
What is the CBAM?
The CBAM imposes a carbon cost on imports of certain goods into the EU, encouraging manufacturers worldwide to adopt greener production methods. The mechanism adjusts the embedded cost of direct and indirect emissions from importers, creating a financial incentive for overseas producers to lower their carbon emissions.
Initially, the CBAM targets sectors like iron, steel, aluminum, cement, fertilizers, electricity, hydrogen, chemical precursors, and certain downstream articles. It covers around 450 individual products defined within customs commodity codes. After a transitional period concluding in 2025, additional sectors like paper, plastics, organic chemicals/polymers, glass, and oil refining are expected to be included.
How Does the CBAM Work?
Importers to the EU are required to purchase CBAM certificates, the price of which is determined by the average weekly auction of the EU Emissions Trading System (EU ETS). These certificates can't be traded and must be continuously held by the declarant registry account.
If imported goods have already been subjected to carbon pricing in their origin country, this paid carbon price can be deducted from the CBAM charges, provided evidence is available. For goods where reasonable benchmark values can't be determined, default values will be set, although these may result in higher prices than actual emissions.
The Transitional Period
From October 1, 2023, to the end of 2025, importers will need to report the emissions embedded in their goods at the time of import into the EU's customs territory. Following this transitional period, the scope of the CBAM will be re-evaluated, and it is likely to be extended to include additional products and services.
The CBAM's Implications for Businesses
Understanding the EU CBAM and its implications is crucial for businesses, both within Europe and globally. Non-EU businesses exporting to the EU will need to account for the added cost of the CBAM, and this could influence strategic decisions around production methods, sourcing, and market focus. It may encourage more businesses to adopt greener technologies and processes, resulting in lower emissions and less environmental impact.
EU businesses also need to understand the CBAM, as it may impact their supply chains and their competitiveness. For instance, EU manufacturers may face less competition from overseas producers not subject to carbon pricing, while companies relying on imported raw materials may see their costs increase.
In conclusion, while the CBAM is complex, it offers an innovative approach to reducing global carbon emissions and shaping a greener, more sustainable future. Businesses need to understand the CBAM to navigate this new landscape successfully
