The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a key part of its drive to reduce greenhouse gas emissions, with a particular focus on several industry sectors in the initial phase. Understanding what the CBAM means for these focus sectors – including iron, steel, aluminium, cement, and others – is vital for businesses operating in or trading with the EU.
CBAM: A Recap
The CBAM aims to prevent ‘carbon leakage’, where businesses shift production to regions with less stringent emissions regulations. It does this by imposing a carbon cost on certain goods imported into the EU, thereby encouraging global industries to adopt cleaner production processes.
Target Sectors
The initial focus sectors for the CBAM are iron and steel, aluminium, cement, fertilisers, electricity, hydrogen, chemical precursors, and some specific downstream articles. These sectors were chosen as they represent significant carbon-emitting industries, and their products can be readily defined by customs commodity codes.
Implications for Focus Sectors
For businesses in these focus sectors, the CBAM means they will need to account for their carbon emissions when exporting to the EU. This could have a significant impact on the cost of doing business, making products from these industries more expensive unless they take measures to reduce their carbon emissions.
Iron, steel, aluminium, and cement manufacturers, for instance, will need to consider their production processes and supply chains. Businesses may need to invest in cleaner technologies, improve energy efficiency, or source lower-carbon raw materials. Furthermore, if they have already been subject to robust carbon pricing in their country of origin, they may reduce the CBAM charges, provided they can provide the necessary evidence.
Looking Ahead
After the transitional period ending in 2025, the CBAM is expected to be expanded to cover additional sectors such as paper, plastics, organic chemicals/polymers, glass, and oil refining. Businesses in these sectors should begin preparing for these changes now by analysing their carbon footprint and exploring ways to reduce emissions.
The CBAM represents a significant change in international trade, and it is expected to spur a global shift towards cleaner production. For the focus sectors, adapting to these changes will be challenging, but also presents an opportunity to lead the way in a greener, more sustainable future. Businesses should embrace the CBAM as a catalyst for change, driving innovation and competitive advantage in the low-carbon economy of the future.
How CBAM Certificates Work: Key Requirements for EU Importers
The European Union’s Carbon Border Adjustment Mechanism (CBAM), a key component of the Fit for 55 package, introduces CBAM certificates as an integral part of its functionality. These certificates are essential for businesses importing goods into the EU, so understanding how they work is a crucial aspect of successful trade operations.
The Function of CBAM Certificates
CBAM certificates represent the mechanism by which carbon costs are accounted for in the CBAM. Importers to the EU will be required to purchase these certificates, with the price calculated based on the average weekly auction of the EU Emissions Trading System (EU ETS). Each certificate corresponds to one tonne of carbon dioxide emissions.
The Unique Nature of CBAM Certificates
Unlike other tradable emission allowances, CBAM certificates cannot be traded and have limited validity. They must be continuously held by the declarant registry account until they are surrendered. This non-tradable feature is designed to avoid speculation and volatility, thus ensuring the stability of the CBAM.
Timing and Surrender of CBAM Certificates
Importers must surrender the equivalent number of CBAM certificates for the embedded emissions in their imported goods by May 31st each year, starting in 2026. This annual submission ensures that all importers are held accountable for the carbon cost of their imported goods.
Accommodating for Pre-existing Carbon Costs
In cases where imported products have already been subject to robust carbon pricing in their origin country, the paid carbon price can be deducted from the EU CBAM charges. This provision ensures that importers are not double-charged for carbon costs, provided they can produce evidence of the initial carbon pricing.
CBAM Certificates and Compliance
Importers need to maintain compliance with the CBAM by ensuring they hold enough certificates to cover their carbon costs. Non-compliance could lead to penalties, which may include additional charges or restrictions on future trading.
In conclusion, understanding how CBAM certificates work is crucial for businesses operating in or with the EU. Not only does this understanding facilitate compliance, but it also enables businesses to factor the cost of carbon into their strategic decision-making, promoting a shift towards cleaner and more sustainable practices. As the world moves towards a more carbon-conscious future, the CBAM and its certificate system serve as an innovative model for achieving carbon neutrality.
