Updated version of CBAM Regulation unveiled

Briefly about CBAM

CBAM is a climate measure that aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic (EU) products that are subject to carbon costs under the EU ETS. And while the EU ETS applies to installations based in the EU and to certain production processes and activities, CBAM will apply to the certain corresponding goods imported to the EU. 

The mechanism will closely reflect EU ETS prices through CBAM certificates which will be priced at the weekly averages of EU ETS auctions. Under CBAM, importers will report annually total verified GHG emissions embedded in goods they imported in given calendar year. In addition, during the calendar year, the importer shall ensure that the number of CBAM certificates in its account in the CBAM registry at the end of each quarter corresponds to at least 80% of the embedded emissions in imported products since the beginning of the calendar year. Then, along with submission of annual CBAM declaration, the importer will surrender CBAM certificates in the exact number corresponding to emissions embedded in goods imported in calendar year.

Between 1 October 2023 and 31 December 2025, transitional provisions will apply where CBAM will work without financial adjustment. Instead, importers, on a quarterly basis, will have to report embedded emissions in goods imported in that quarter of calendar year, detailing direct and indirect emissions as well as any carbon price effectively paid in third country.

Key changes compared to initial proposal

The general principles of functioning of the CBAM will remain the same. The key changes, compared to initial CBAM proposal are as following:

1. Extension of CBAM products scope
2. Entry of transitional period on 1 October 2023, instead of 1 January 2023
3. Extension of scope of embedded emissions 
4. Introduction of exceptions that exclude certain imports from CBAM coverage 
5. More detailed rules on application for an authorisation
6. Extended list of circumvention practices

1. Extension of CBAM products scope

Current draft extended the CBAM scope on following products:

• kaolin and other kaolinic clays, calcined
• aluminous cement
• certain ferro-alloys
• agglomerated iron ores and concentrates
• screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles of iron and steel
• other articles of iron or steel
• aluminium structures and parts of structures
• certain aluminium reservoirs, tanks, vats, containers
• stranded wire, cables, plaited bands and the like, of aluminium, not electrically insulated
• other articles of aluminium and
• hydrogen

2. Entry of transitional period on 1 October 2023, instead of 1 January 2023

Indeed, the transitional period will start in October 2023. During this time, until 31 December 2025, the obligations for the importers will be limited to the reporting requirements without financial adjustments (the details on reporting requirements have been provided above). 

3. Extension of scope of embedded emissions

Compared to the initial proposal, the definition of embedded emissions has been extended to indirect emissions. It means that after the transitional period, when financial adjustment will be in place, importers will have to purchase CBAM certificates reflecting both direct and indirect embedded emissions. However, there will be an exception, i.e. for certain iron and steel products which in the EU are subject measures compensating for indirect emission costs incurred from emission costs passed on in electricity prices.

4. Introduction of exceptions that exclude certain imports from CBAM coverage

The requirements related to CBAM will not apply to:

• imported goods which intrinsic value does not exceed, per consignment, EUR 150
• goods contained in personal luggage of travellers from a third country provided that the intrinsic value of such goods does not exceed EUR 150
• goods to be moved or used in the context of military activities

5. More detailed rules on application for an authorisation

New proposal is more detailed with regard to application for authorisation rules. It envisages that importer established in Member State shall prior to importing CBAM goods, apply for the status of authorised CBAM declarant. In cases where such importer uses indirect representation, the application for this status shall be submitted by indirect customs representatives. The same will work for the importers not established in Member State, i.e. in such case the application shall be submitted by the indirect customs representative.

It shall be noted that rules regarding application for authorisation will enter into force on 31 December 2024.

6. Extended list of circumvention practices

Examples of circumvention practices have been slightly extended, however it is now an open catalogue of practices which may consist of, but are not limited to:

• slight modification of goods to change Combined Nomenclature classification
• artificial split of shipments to benefit from CBAM exceptions described above.

How the new rules will affect market actors

In general, CBAM will affect mainly EU importers through new administrative burdens and costs related to emissions embedded in imported products. Third country producers may be affected if they voluntarily decide e.g. to measure their CO2 emissions, verify them and share them with EU importers – for the purposes of calculating actual embedded emissions. Finally, CBAM will affect the EU market too, because – in general – it will cause that imports will be more expensive due to financial adjustments, levelling the playing field for EU producers subject to the EU ETS.

Despite the financial adjustments that will apply starting from 1 January 2026, importers shall begin preparation for the transitional period. As mentioned, during this period, importers will have reporting obligations. Implementing acts concerning the application of elements of embedded emissions calculations are yet to be developed by the European Commission. Hence, key challenges for the importers may be related to reliable calculation of embedded emissions and obtaining information whether carbon price has been paid in third country. And what is important: even during the transitional period a penalty may be imposed on importer who failed to submit quarterly report or has not taken necessary steps to correct CBAM report. Penalties are not yet specified, however it shall be “effective, proportionate and dissuasive”.