Everything you need to know about the EU legislation to prevent ‘carbon leakage’
What is the CBAM?
As part of the EUs ‘Fit for 55’ package of climate measures, the legislation that provides for a Carbon Border Adjustment Mechanism (CBAM) has been published and will begin to come into effect from October 1st, 2023.
The aim of this legislation is to prevent ‘carbon leakage’. Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with less stringent emission constraints.
The imposition of a CBAM will equalise the cost of affected commodities manufactured in third countries relative to the EU and it is hoped that it will act as a disincentive for EU importers to purchase such commodities that were produced with high levels of greenhouse gas (GHG) emissions. Furthermore, it is hoped, it will encourage producers around the world to adopt more climate-friendly manufacturing practices.
What products are covered by CBAM?
The CBAM will initially apply to imports of goods identified in Annex 1 to Regulation 2023/956. These include:
- cement,
- iron and steel,
- aluminium,
- fertilisers,
- electricity; and
- hydrogen.
CBAM legislation will also apply to downstream products – e.g., articles/items made from imported iron/steel.
It is anticipated that organic chemicals and polymers will soon be added to this list of commodities. Both direct and indirect emissions will fall within the scope of CBAM.
Direct emissions are those arising from manufacturing CBAM-covered products and indirect emissions are those arising from electricity used in manufacturing covered products.
How will it work in practice?
To import goods covered by the CBAM legislation into the European Union, it will be necessary for the importer to be an authorised CBAM declarant established in the EU. Importers not established in the EU may appoint an indirect customs representative to become an authorised CBAM declarant to act on their behalf.
When fully implemented (i.e., Jan ‘26), CBAM will mirror the current Emissions Trading Scheme (ETS) insofar as the system will require importers to purchase certificates. These certificates will be surrendered to the authorities at the point of import into the EU.
The price of the CBAM certificates will vary according to the weekly auction price of the EU ETS allowances. EU importers who purchase listed commodities from third countries will have to participate in the CBAM which means buying CBAM certificates to cover the embedded GHG emissions.
It will be necessary to have accurate and verified emissions data for the goods being imported. If an importer does not have or cannot get this emissions data, a default rate will be applied.
The Federal Public Service (FPS) Health, Food Chain Safety and Environment is designated as the national authority and will preside over how CBAM is implemented in Belgium.
What happens in October 2023?
During the transitional period that begins on 1st of October 2023, businesses will be required to report, on a quarterly basis, the embedded emissions in the imported goods (during that quarter of a calendar year).
During the transitional period, reporting declarants are required to submit a CBAM report within one month after the end of each quarter. Therefore, the first CBAM reports will be due in January 2024.
In the CBAM reports, businesses must detail both the direct and indirect emissions, as well as any carbon price effectively paid in the country of origin.
What should importers of CBAM goods do now?
- Importing companies should now begin the process of reviewing their supply chains to understand how their business might be affected by CBAM.
- Using Annex I to Regulation 2023/954, identify if any of the goods that your company imports is covered by CBAM legislation. Understand the volume of these goods your company purchases from non-EU suppliers.
- Next, for CBAM goods your company imports, it will be necessary to engage with 3rd country suppliers to begin the process of gathering emissions data.
- Consider how your company will comply with the reporting requirements and identify the individual responsible for this function.
Reporting requirements
During the transition period from 1 October 2023 to 31 December 2025, the importer will be obliged to submit quarterly CBAM reports on the goods imported in the previous quarter of the calendar year, their embedded greenhouse gases emissions, etc. The CBAM report shall be submitted no later than one month after the end of each quarter. Customs will inform the importer or his indirect customs representative of this obligation no later than at the time of the release of the goods for free circulation.
More granular information as to what shall be included in the CBAM quarterly reports has not yet been finalized. However, the Commission has published a draft implementing regulation with this information that was open for public consultation until 11th of July 2023. It is anticipated that the Implementing Regulation will be formally adopted soon.
Obligations for Companies from January 2026
From 1 January 2026, a CBAM license will be required to import goods covered by the CBAM legislation, and importers will be required to purchase and submit CBAM certificates for the embedded emissions of the products.
EU importers will have to declare annually the quantity of goods and the number of embedded emissions in the total goods they imported into the EU in the preceding year and submit the corresponding amount of CBAM certificates.
Enforcement of CBAM
In the legal text of Regulation 2023/956, the measures/penalties designed to encourage compliance with the CBAM provisions are described as “effective, proportionate and dissuasive”.
How can BDO help your business?
BDO is closely monitoring announcements from the European Commission and the Belgian national authorities in respect of how to comply with the new CBAM regulations.
BDO can help your business with preparatory work in advance of CBAM coming into effect.
This includes:
- Keeping your business informed of latest CBAM developments;
- Review of goods imported into the EU from 3rd countries;
- Identification of CBAM-affected products;
- CN classification review in respect of CBAM legislation;
- Supply chain review;
- Assistance in respect of communication with suppliers.
For more information, contact Katrien Kegels (Katrien.kegels@bdo.be) or Luc Sambre (luc.sambre@bdo.be).