In its fight towards climate change, the European Parliament approved on 18th April 2023, three pieces of legislation from Fit for 55 package aiming at reducing greenhouse gas emissions. Among them was the Carbon Border Adjustment Mechanism (CBAM), aiming to attribute a carbon cost to specific imported goods/products.
Background
The Fit for 55 EU legislative package was initially announced in July 2021 and it is a crucial tool in achieving a reduction of emissions by a minimum of 55% by 2030 (compared to 1990 levels). These goals are a part of the European Climate Law and aligned with the overall European Green Deal strategy that targets climate neutrality by 2050. The package encompasses a range of measures, including a proposal for a CBAM, extensive modifications to the EU ETS, amendments to the Effort Sharing Regulation (ESR) and energy efficiency and taxation Directives all of which establish targets for reducing emissions.
The introduction of CBAM
A "carbon leakage" risk exist when EU companies relocate carbon-intensive production to countries with less stringent climate policies or import more carbon-intensive goods.
To address this, the EU introduced the Carbon Border Adjustment Mechanism (CBAM)- a climate measure that aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic (EU) production subject to carbon costs under the EU ETS. While the EU ETS applies to EU based facilities and to certain production activities, CBAM is applicable to certain goods imported to the EU and subject to embedded emissions.
Such product categories include certain types of aluminum, cement, iron, kaolin, fertilizers, ferro-alloys, hydrogen, electrical energy, stranded wire, cables etc. The product list covered by the new legislation is significantly larger than the one provided by earlier drafts of the legislation, meaning more businesses will be affected by the new rules.
In the new legislation the definition of embedded emissions has also been expanded to encompass indirect emissions. The emissions reporting will be executed via the utilization of actual emissions per the schema provided by regulators in the EU. In case where actual emissions are not available, standard "default" values reflecting average emissions for a particular product produced in a certain country shall be used. In case where such practice is difficult to unavailable data the default values will be determined by the EU Commission.
Transitional period up to December 2025
The period of transition for CBAM will be from 1 October 2023 to 31 December 2025. During this period, there will be some temporary measures in place. Importers will only need to report their emissions on a quarterly basis, while CBAM certificates’ purchasing will be optional. During quarterly reporting importers will also need to report the embedded emissions in the goods imported during that particular quarter, including details of direct and indirect emission and any carbon costs paid in non - EU countries.
It is important to also note that, as of 31 December 2024, importers will need to have an "authorized CBAM declarant" status to be able to import goods that fall under the scope of the CBAM.
The ‘Permanent’ Regime
Once the gradual phasing of CBAM is over and the system will enter into permanent force in January 2025 importers shall declare the goods imported and their embedded verified greenhouse gas (GHG) emissions. The carbon cost paid in the country of source/origin shall be deductible from the payable CBAM charges, provided that relevant proof of cost is provided.
The payments of CBAM charges will be facilitated through the acquisition and surrender of CMBAM certificates. The certificates price will be determined based on the weekly average auction price of EU ETS allowances (i.e. €/tonne of CO2 emitted)
What is next for businesses?
Considering that the implementation period for CBAN is soon approaching (i.e. 1st October 2023) affected businesses should take prompt actions including:
- Review the new legislation and identify risks/ costs for their businesses;
- Evaluate financial impact, supply chains structures and production;
- Assign responsible persons/teams to handle internally CBAM procedures;
- Commencing preparations to comply with the transitional-period.
It will also crucial for businesses to be pro-active and abreast of developments as the legislative process for CBAM and the closely interconnected.
Contact:
Simos Simou: Senior Manager, Indirect Tax & Controversy
