EU’s Carbon Border Adjustment Mechanism comes into effect

On the 1 October 2023, the European Union’s Carbon Border Adjustment Mechanism (“CBAM”) entered into effect, starting with a transitional phase that runs until the end of 2025 (the Transitional Period”). The CBAM was introduced by EU Regulation 2023/956 establishing a carbon border adjustment mechanism (the “Regulation”) and further supplemented by Commission Implementing Regulation 2023/1773 of 17 August 2023.

The purpose of CBAM is two-fold. The primary objective is that of addressing greenhouse gas emissions embedded in goods on their importation into the customs territory of the EU to prevent carbon leakage, thereby reducing global carbon emissions and supporting the goals of the Paris Agreement. The secondary objective is to financially incentivise operators based in non-EU countries to reduce carbon emissions in their production processes. Moreover, the CBAM will level the playing field between the producers of goods based in non-EU Countries which export goods to EU-based importers, and European producers who are already subject to a carbon price in terms of the EU Emissions Trading Scheme (the “EU ETS”).

The CBAM will initially apply to six industries which are heavily reliant on carbon emissions and produce: cement, hydrogen, fertilisers, aluminium, electricity and iron and steel. During the Transitional Period, EU-based importers of goods covered by the CBAM from non-EU countries are obliged to report the embedded emissions of their imports without incurring any financial liabilities. From 2026, imports of these goods into the EU will be charged a carbon levy based on the embedded emissions generated during the production process that should reflect the allowance price level in the EU ETS

Simply put, as from the 1 October 2023 EU Importers shall provide, based on the information provided by operators producing goods in non-EU countries, a report (the “CBAM Report”) including the following information regarding those goods mentioned above:

  1. the quantity of the goods imported, expressed in megawatt hours for electricity and in tonnes for other goods;
  2. the type of goods as identified by their eight-digit CN code.

The CBAM Report shall also include:

  1. the country of origin of the imported goods;
  2. where the goods were produced, identified by the following data:
    1. the applicable United Nations Code for Trade and Transport Location of the location;
    2. the company name of the installation, the address of the installation and its English transcript; and
    3. geographical coordinates of the main emission source of the location
  3. the technology used for the production of the goods for determining the embedded direct emissions;
  4. the specific embedded direct emissions of the goods; and
  5. the reporting requirements that influence the embedded emissions of the goods.

For the importation of electricity, the EU Importer shall also include the emission factor used for electricity and the data source or method used for determining the emission factor of electricity. In the case of steel goods, the EU Importer shall include the identification number of the specific steel mill where a particular batch of raw materials was produced, where this is known.

An EU Importer may request third country operators to complete an electronic template prepared by the EU Commission to provide the EU Importer with the necessary information in order to prepare the CBAM Report.

For each quarter from 1 October 2023 until 31 December 2025 the EU Importers shall submit the CBAM reports to the CBAM Transitional Registry no later than one month after the end of that quarter.

In terms of the Commission Implementing Regulation, Member States shall apply penalties in the following cases:

  1. where the EU Importer has not taken the necessary steps to comply with the obligation to submit a CBAM report; or
  2. where the CBAM report is incorrect or incomplete in accordance with Article 13, and the EU Importer has not taken the necessary steps to correct the CBAM report where the competent authority initiated the correction procedure.

The penalties incurred can be between EUR 10 and EUR 50 per tonne of unreported emissions. The penalties will increase in accordance with the European index of consumer prices.

This Transitional Period will allow for a careful, predictable, and proportionate transition for EU and non-EU businesses and for public authorities alike. During this period, importers of goods within scope will only have to report greenhouse gas emissions embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments.

Going forward, EU Importers and non-EU manufacturers will need to take into account their respective responsibilities under the CBAM, including identifying those imports which fall within the scope of CBAM and assigning designated teams responsible for the preparation of the CBAM Reports.