Carbon Border Adjustment Mechanisms
Motivated by the EU climate ambition, on August 2023 the Carbon Border Adjustment Mechanism (CBAM) Regulation (2023/1773) entered into force, as key part of the EU’s climate action plan: 55% of net reduction in greenhouse gas emissions (referenced to 1990) by 2030 and become climate-neutral by 2050. This tool is aimed at facing two main aspects: by one hand, avoiding the risk of carbon leakage, which occurs when companies based in the EU displace their carbon-intensive production outside of the EU to countries with looser climate policies in relation to EU, or when EU products are replaced by carbon-intensive imports from outside EU territory. On the other side, CBAM is aimed at putting a fair price in the carbon emitted during production of carbon intensive goods that are entering the EU, and encouraging cleaner production in non-EU countries, being aligned with the EU Emission Trading System (ETS).
The development of CBAM tool started on July 2021, when the European Commission adopted its proposal, reaching the provisional agreement of the EU Parliament on December 2022. On May 2023, CBAM was adopted by the EU Parliament and on August 2023, The European Commission published an implementing regulation of CBAM, laying down the obligations regarding reporting of the involved stakeholders. With it, the transitional period started on 2023 October 1st, determining the deadline of the first CBAM report on 31st of January 2024. From that, a quarterly reporting period is determined.
The CBAM is being applied in a gradual phase, starting on its transitional period. The aim of this progressive approach is to serve as pilot and learning period for all the actor involved in it, and to collect useful information for the methodology refining. At this point, it is intended to apply to selected carbon-intensive precursors with significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. EU released a list of CN codes which are mandatory to be implemented in the methodology.
Due to the period of transition, the requirements allow some flexibility regarding the values used when it comes to embedded emissions. In this regard, the companies are allowed to report through three different options: full reporting according the new methodology, based on an equivalent method, or based on reference values (only valid until July 2024). From January 1st 2025, only the EU method will be accepted. When the permanent system will be mandatory (1st January 2026), the importers will declare annually the quantity of goods imported to the EU in the preceding year and their embedded emissions. After the reporting, the Regulation allows extra months after the reporting deadline for corrections. In the case of the first two quarterly reports, a longer period is allowed: until the deadline of the third report (31st July 2024). During the definitive period, it will be two months.
CBAM is applied on the actual embedded direct and indirect emissions on the goods imported to the EU according to the methodology in line to the EU ETS for the production of goods in the EU. For facilitating the implementation of the methodology, the EU released different guidelines (for importers of CBAM goods and for third-countries producers), as well as a communication template, which its use is not mandatory but recommended.