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Myths and superstitions surrounding the "carbon tariff"

We have reported on the latest developments in the Carbon Tariff Mechanism (CBAM) HERE. We are also preparing a webinar on this topic to be held online on 11 September 2023 - you can register HERE.

Discussions with importers, who will be affected by the first obligations from 1 October 2023, suggest that there are many myths and superstitions surrounding the carbon duty mechanism in practice. We have summarised some of these in this article.

1.  "I don't have to do anything about the CBAM until the end of 2026 because no payment is required." 

While it is true that there is no associated payment (purchase of carbon certificates) until the end of 2026, importers will be required to report, among other things, emissions contained in imported (selected) goods to the relevant authority from October 2023. Non-compliance with this obligation will be penalised.

2.   "If I fail to register for the CBAM on time, nothing happens, VAT registration can also be processed retrospectively."

In practice, if an importer fails to register for the scheme in time (i.e. by the end of 2024), the customs authority may refuse to release the goods subject to carbon duty into the relevant customs regime upon importation. We therefore recommend monitoring the issue and registering in the system in due time.

3.   "I do not handle customs issues, I already have an indirect customs representative who handles everything for me. I will instruct the representative to perform all the duties related to the carbon duty mechanism on my behalf."

The importer may delegate to an indirect customs representative the obligations arising from the new regulation, but the representative must agree to this. It cannot be automatically assumed that the representative will be able to contact all relevant suppliers and obtain all necessary data from them. Also, the willingness to take responsibility for reporting emissions or purchasing certificates for importers may be quite limited.

4.   "I have checked my imports and I do not import any goods subject to the CBAM, so the issue does not concern me and I do not need to address it further."

Importers must continue to monitor the issue as the composition of the goods they import may change. In addition, the Commission intends to expand the list of goods subject to the carbon duty significantly over time.

5.   "The goods I import are zero-rated or benefit from special procedures, so I will not pay a carbon duty."

There is no link between the tariff rate and the carbon duty, although the related obligation (payment/reporting) in both cases is based on the tariff classification of the goods. Even zero-rated goods may be subject to CBAM.

It is true that carbon duty obligations generally only arise when goods are released for free circulation - special procedures (e.g. inward processing arrangements) can help in this respect. However, in certain circumstances, they can complicate reporting - e.g. in a situation where the importer releases processed goods for free circulation after processing, he may be obliged to report emissions contained in the materials imported for processing, even if the final processed goods are not subject to the CBAM.

6.   "I trade exclusively with Switzerland, Norway and the UK, so I do not have to deal with any obligations related to the CBAM."

Switzerland and Norway are indeed exceptions that are not covered by the mechanism. However, in assessing whether goods are covered by the mechanism, it is necessary to look at the (non-preferential) origin of the imported goods, not just where the goods are physically imported from/where the supplier is established.

The UK, like Turkey, which is a member of a customs union with the EU, does not have an exemption.

7.   "We have very advanced IT systems, reporting will not be a problem for us."

Even with advanced IT systems, data on imported goods will need to be obtained from suppliers and reported. Proper reporting will only be possible in cooperation with the supplier, who is not directly affected by the new obligations. It will therefore be crucial to set up the cooperation also from a legal point of view.

The new regulation is relevant not only for companies that import or produce goods with a higher carbon footprint. As the carbon duty mechanism will start to operate as early as 1 October 2023, it is recommended to start preparing for the new reporting obligations as soon as possible. We will be pleased to help you prepare.

For more information, please contact the authors of this article or the EY client team you are working with.

Authors:

Jakub Kašuba
Nikola Kratochvílová