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Will CBAM impact your transactional model, your compliance and costs?

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CBAM is a levy intended to prevent carbon leakage of emission-intensive products, namely iron, steel, cement, aluminium, fertilizers, electricity and hydrogen.


In brief

  • The European Parliament reached a provisional agreement with the Council of the EU to implement an EU Carbon Border Adjustment Mechanism (CBAM). 
  • CBAM is intended to prevent carbon leakage whereby emission-intensive production is relocated to third-countries and the products eventually are consumed in Europe.
  • CBAM is essentially a levy applied on EU imports of products in specific product categories iron, steel, cement, aluminium, fertilizers, electricity and hydrogen.

On December 13, 2022, the European Parliament (EP) reached a provisional agreement with the Council of the EU (CEU) to implement an EU Carbon Border Adjustment Mechanism (CBAM). This agreement will be effective from October 1, 2023, and it will significantly impact businesses in the scope of the new measures. 

CBAM will target emission-intensive imports

  • CBAM is intended to prevent carbon leakage whereby emission-intensive production is relocated to third-countries and the products eventually are consumed in Europe.
  • CBAM is essentially a levy applied on EU imports of products in certain product categories, mainly iron and steel including some downstream products (e.g., including screws, bolts), cement, aluminium, fertilizers, electricity, and hydrogen (new addition).

It is expected that other products covered by the EU Emission Trading System (ETS) such as organic chemicals, plastics and polymers will be added to the CBAM scope in the near future. The CBAM regime will apply from October 1, 2023, starting with a transitional period focused on quarterly reporting. From 2026, the surrendering of CBAM certificates will be gradually introduced mirroring the free allocation phase-out for CBAM sectors in the ETS, which is part of the EU ETS reform.

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Calculation of emissions – third party data may be required

The CBAM calculations will be based on “embedded emissions” which refers to direct emissions occurring upon manufacture (Scope 1)​, as well as indirect emissions under certain conditions, relating to the production of electricity consumed during the manufacturing processes (Scope 2). 
 

Reporting requirements – incorrect reporting may result in investigation from the respective authorities

CBAM will create significant incremental administrative requirements, e.g., declarations, registering as the authorized declarant and reporting, whereby the eventual burden will depend on the current business and transactional model in place. In essence, the more declarants (e.g., importer of record), the higher the compliance burden. Incorrect or no reporting could result in questions from the CBAM or customs authorities. Eventually, if the importer or its representative fails to surrender CBAM certificate correctly it will attract penalties according to the provisions of the draft regulations.
 

Purchase and surrender of CBAM certificates

Businesses importing products subject to CBAM will have to purchase “CBAM certificates” throughout the year and surrender them annually. CBAM certificates cannot be traded on the EU ETS market. The price of CBAM certificates will be based on the average of the closing prices of all EU ETS auctions during each calendar week. Where goods imported into the EU have already been subject to carbon pricing in the country of production, only the difference will have to be paid.
 

Agreement awaits formal approval in the EU

The agreement is dependent on the EU ETS reform, specifically the phase-out of free allowances. The EP and CEU reached a provisional agreement on the ETS reform on 19th December 2022. The two provisional agreements require formal approval from the European Parliament and European Council (Member States) before the new regulations come into force. This is expected to happen on short notice.
 

What does this mean for you?

CBAM will impact businesses in Switzerland, in the EU and across the globe, from an operational response perspective and in terms of strategic decision-making. EU imports originating from Switzerland are excluded from the agreement due to the linkage of the ETS since 2020. Nevertheless, the CBAM will directly impact Swiss companies having procurement, manufacturing, and/or distribution activities in the EU, either directly or via subsidiaries, who import ‘CBAM products’ into the EU. Impacts may be either direct or indirect – for example, costs of certificates impacting competitiveness and new compliance obligations, which will require new data points across different parts of the business. A holistic approach across the value chain and supply chain is required from planning to implementation.

Summary

CBAM will have a significant disruptive impact on emission and energy-intensive industries and businesses in Switzerland, in the EU and across the globe, from an operational response perspective and in terms of strategic decision-making. Therefore, businesses should proactively embrace the changes and prepare to align their business model to the expected carbon emissions framework.

Acknowledgement:

Many thanks to Leonie Smit for her valuable contribution to this article.

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Carbon Border Adjustment Mechanism (CBAM) update and its impact on the EU cross-border imports

The European Parliament’s legislative procedure is underway to enact CBAM. The recent recommendations from the responsible committee call for substantial transformation of the initial draft and rapid deployment with wider coverage. As per the current status, the business should be ready for CBAM compliance starting from January 2023.