Important: Transition period
To assist stakeholders in preparing for the new reporting obligations starting from October 2023, and to facilitate navigation during the transition period (from October 2023 to December 2025), the European Commission has prepared accessible written guidance documents available through the CBAM Guide.
The European Commission has also provided European importers with a detailed checklist and sector-specific information sheets for importers of goods falling within the scope of the Carbon Border Adjustment Mechanism (CBAM), here.
Exporting companies must prepare for the EU's CBAM.
To achieve its goal of reducing emissions by 55% by 2030 (compared to 1990 levels) and reaching carbon neutrality by 2050, the EU and its member states must take specific measures to decarbonise the economy. The "Fit for 55" package consists of a set of legislative proposals, including the CBAM.
CBAM is a regulation that aims to counter carbon leakage – a situation whereby companies based in the EU move carbon-intensive production abroad to countries with less stringent climate policies, or when EU products are replaced by more carbon-intensive imports. The regulation will help to reduce emissions globally while providing a level playing field for businesses.
In 2021, 30% of the EU’s carbon emissions came from imports.
The EU’s final consumption of goods and services caused 3.5 billion tonnes of global CO2 emissions, of which 1.1 billion tonnes originated from imports into the EU. However, to reduce its carbon footprint the EU is primarily acting within its territory through the EU Emissions Trading System (EU ETS), which imposes an emissions cap on European industries by issuing emission quotas. Companies that exceed their quotas are required to purchase additional allowances on the carbon market, thus encouraging them to invest in clean technologies. CBAM aims to address "carbon leakage" and ensure fairness in the competition conditions between EU producers and producers from third countries.
The EU ETS in a nutshell
The EU ETS operates on a "cap and trade" system. The "cap" signifies the maximum GHGs that facilities eligible under the system are allowed to emit. This cap is progressively lowered each year to align with the EU’s climate goals, leading to a decrease in overall EU emissions. By 2023, thanks to the EU ETS, emissions from power and industrial plants in Europe dropped by roughly 47% from their 2005 figures.
In the EU ETS, the cap is represented by emission allowances, where one allowance permits the emission of one tonne of CO2 equivalent. These allowances are distributed via auctions and can be traded on the market. As the cap is reduced, the number of available allowances in the market also goes down. Companies within the system are required to monitor and report their emissions annually and must surrender enough allowances to cover their emissions each year. Failure to comply results in severe penalties. While the majority of allowances are auctioned off, some are allocated to companies at no cost. Companies are free to trade allowances as necessary. Reductions in emissions enable a company to sell excess allowances or save them for future use.
The price of allowances, governed by the EU carbon market, is influenced by the decreasing cap which signals a long-term reduction in allowance availability, thus maintaining their market value. This pricing mechanism incentivises companies to lower emissions in a cost-effective manner and also determines the revenue from allowance sales which, since 2013, has exceeded EUR 175 billion. These revenues primarily go to national budgets, and member states are required to invest this income in renewable energies, energy efficiency, and other low-carbon technologies, reducing emissions. Additionally, portions of the EU ETS revenues fund the Innovation Fund and the Modernisation Fund, both of which support low-carbon innovations and the broader EU energy transition.
The CBAM subjects companies located in third countries to the same environmental standards as those imposed on companies operating within the EU.
The dual purpose of this mechanism is to avoid importing goods whose production accelerates global warming and to deter European companies from transferring their emissions by relocating their activities abroad. Otherwise, faced with the environmental regulation imposed in the EU, multinationals based in the EU may be tempted to relocate their activities to pollute "freely" elsewhere.
Under the “polluter-pays” principle, the carbon market implemented by the EU aims to measure, control, and reduce the emissions of its industries and electricity producers. GHG emission quotas are allocated to companies based in Europe. Companies whose emissions are below their defined limit can sell the surplus allowances, while companies that emit more GHGs than their quotas must purchase additional allowances on the market.
The surcharges provided for by the CBAM are based on the prices derived from the EU ETS.
Goods imported into Europe that have a carbon footprint exceeding a certain threshold will be subject to a "surcharge". Companies exporting to the EU will thus be encouraged to turn to technologies with lower emissions.
The CBAM is not, strictly speaking, a "carbon tax" to be levied when goods clear customs. Instead, importers of goods from third countries would be required to buy CBAM certificates from national authorities, with prices indexed to the CO2 price within the European carbon market.
CBAM transitional phase (2023-2025)
CBAM will apply in its definitive regime from 2026, while the current transitional phase lasts from 2023 to 2025. This gradual introduction of the CBAM is aligned with the phase-out of free allowances under the EU ETS which supports the decarbonisation of EU industry.
The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – apply to more than 50% of the emissions in EU ETS-covered sectors. The objective of the transitional period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions in order to refine the methodology for the definitive period.
During this transition period, importers of goods in the scope of the new rules will only have to report GHG embedded in their imports (direct and indirect emissions), without needing to purchase or submit certificates. Indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers) on the basis of a defined methodology.
