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Practical lessons learned: The CBAM reporting clock is ticking to ensure compliance by 31 January 2024

Many companies are not ready for the first deadline as they do not fully grasp the requirements, obligations and subsequent implications.


In brief

  • CBAM reporting presents a challenge, but it can be tackled with immediate action to understand reporting obligations and collect required data
  • Mapping the implications from importing CBAM goods is critical, necessitating close monitoring of data and precise forecasting to manage carbon costs in 2026
  • Promoting cross-functional collaboration and simplifying the transactional model can significantly facilitate CBAM compliance and mitigate costs

With the first reporting obligation for the Carbon Border Adjustment Mechanism (CBAM) due by 31 January 2024, it is essential that impacted businesses take immediate action as many are still unprepared. Aimed at limiting carbon leakage, CBAM imposes a cost on the carbon content of certain imported goods (aluminum, fertilizers, hydrogen, iron and steel, cement, and electricity) originating from non-EU/EFTA countries. Ensuring compliance readiness necessitates prioritizing systematic data acquisition through fostering inter-departmental collaboration given that sustainability regulations such as CBAM require input from various functions, including procurement, legal, tax, customs and sustainability. Following our work with various clients to prepare for the first CBAM report, we are sharing below three practical lessons learned to prepare for the upcoming reporting requirements:

1. Understanding Reporting Obligations based on trade flows, customs data and forecasting

Fully comprehending the responsibilities under CBAM reporting is essential for businesses. This starts with an assessment of the nature of imports and needs to extend beyond “expected” goods to encompass non-conventional items such as spare parts and equipment. As the customs declaration will form the basis for the review of the CBAM quarterly report, a sense-check with customs data and discussions with procurement will help mitigate any unexpected compliance obligations, from a product, country of origin and importer perspective. Robust customs origin analysis is essential as CBAM does not apply to goods of EU/EFTA origin. One critical consideration is maintaining non-preferential origin and documenting it accordingly in order to exempt goods originating from EU/EFTA countries from CBAM reporting and future financial obligations. The use of the Inward Processing customs procedure demands additional assessment and incites further reporting requirements. Overall, an accurate understanding of the trade flows and applied customs procedures, continued monitoring and precise forecasting of CBAM-covered imports will form the basis for ensuring CBAM compliance and understanding financial implications starting 2026. Additionally, during the transition period, emission factors for electricity as input for other CBAM goods will likely be based on the average emission factor of the country-of-origin electricity grid, which will thus differ per third country with potential implications for the number of indirect emissions.

2. Streamlining Data Collection essential given number of required CBAM data points

Data collection is the second hurdle in the path to proper CBAM reporting and understanding financial implications in the near future. The task is inherently complex as information is not confined within the company's borders; some data must be procured from suppliers potentially beyond tier-1, risking significant delays. Companies must initiate the process as soon as possible to restrict these challenges. While a customs agent may act as the representative for CBAM reporting purposes, the collection of installation information from suppliers will likely remain the duty of the internal procurement or supply chain department. We have seen that not all customs agents are active in supporting the importers in filing the CBAM report. This is particularly challenging for non-EU established companies importing CBAM covered goods into the EU. Registration and access to the CBAM portal are not uniform across the EU member states, which adds to operational complexity.

 

In the interim period, many businesses are expected to lean on default values for emissions reporting till 31 July 2024 which still requires information on the installation of production and import procedures. However, it should be noted that as of 1 January 2025 (period between 31 July 2024 and 1 January 2025 existing monitoring and reporting systems can be used), only the EU-validated method will be accepted. Moreover, estimates, including default values, can represent less than 20% of total emissions only for complicated goods after the leniency period. Starting 2026, companies will have to purchase CBAM certificates that are non-transferable. With only limited possibilities to resell unused certificates, the emphasis on robust emissions information and detailed forecasting will increase. Therefore, developing effective strategies for smooth, cross-departmental data collection while maintaining the accuracy and uniformity of the data is of utmost importance.

 

3. Facilitating Cross-Functional Collaboration with options to mitigate compliance burden

Facilitating cooperation across various departments is another crucial lesson, as already shortly highlighted above. Active collaboration among the respective legal entities importing CBAM-covered goods and central functions such as procurement, legal, tax, and customs at the group level can significantly ease the compliance-readiness process. This becomes particularly true when the number of ‘importer of records’ may be greater than initially anticipated. The CBAM rules necessitate each legal entity importing CBAM-covered goods throughout the year to submit four reports annually, potentially significantly increasing compliance costs solely linked to regulatory requirements. Moreover, unlike ETS allowances for instance, CBAM certificates cannot be surrendered by an entity different than the purchaser. Essentially, this highlights the prospective surge in financial expenditure and complexity businesses might face in the process of abiding by the CBAM regulation. Thus, encouraging cross-functional teamwork is indispensable for efficiently ensuring compliance in which stakeholder engagement and education are required as soon as possible.

 

To conclude: immediate action is required to ensure reporting readiness by 31 January 2024

The onset of CBAM reporting is a challenge that can be managed by taking immediate action given the short timeline remaining. Companies that are unaware of their complete CBAM liability given unexpected imports/importers, underestimate the complex data collection and apply a siloed approach to dealing with sustainability regulations risk penalties for incompliance. Key actions include ensuring accurate understanding of CBAM obligations, operationalizing robust data collection methodologies and facilitating effective cross-functional cooperation. Through prioritizing the company’s CBAM response, corporations can ensure cost-efficient compliance with this new policy and may harness this opportunity to promote their global decarbonization efforts.

Summary

The first CBAM quarterly report is due by 31 January 2024. It is crucial for businesses to understand the obligations, requirements and implications of this novel EU policy. Data availability and collection is a challenge and key to proper CBAM reporting which should be tackled on a cross-functional basis. Immediate action can help corporations avoid penalties for non-compliance.

Acknowledgement

Many thanks to Jonathan Baumeler, Leonie Smit and Salvador Sullivan for their valuable contribution to this article.

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