EU introduces CBAM to combat carbon leakage

The EU has introduced the Carbon Border Adjustment Mechanism (CBAM) to prevent the leakage of GHG emissions and to price CO₂ emissions in the production of imported goods. The CBAM is intended to ensure that the same carbon price is paid for GHG emissions from certain imported goods as in the EU Emissions Trading System (EU ETS), thereby contributing to global climate protection.

Impact and objective of the CBAM

On August 17, 2023 a detailed reporting obligation for the transition period of the Carbon Border Adjustment Mechanism (CBAM) was adopted by the European Commission (Implementing Regulation). The aim is to counteract the risk of greenhouse gas emissions being shifted, as there are different reduction targets worldwide. The aim is to strengthen climate protection and prevent the shifting of emissions to countries with lower or no carbon prices. The CBAM aims to price the emissions associated with the production of imported goods (so-called gray emissions) in the same way as goods produced in the EU in order to compensate for competitive disadvantages.

The introduction of the CBAM by the EU is intended to replace existing measures and, in particular, influence the allocation of EU emissions trading certificates and the compensation of indirect costs of the EU ETS in electricity prices.

EU emissions trading currently covers the industry and energy sectors and leads to rising CO₂ prices, which harbors the risk of carbon leakage.

Affected products

Initially, the border adjustment system will be applied to the import of specific goods and selected precursors that have a high CO₂ intensity. These include cement, iron and steel, aluminium, fertilizers, electricity and hydrogen.

Reporting obligation

During a transition period from 2023 to 2025, simplified reporting obligations without financial obligations apply to importers. This means that importers must report when goods from the aforementioned CBAM groups are imported into the EU. Importers must submit a CBAM report to the EU Commission every quarter of a calendar year. The simplified reporting obligations cover the following data points:

• The volume of imported goods MWh for electricity and t for goods;

• The direct and indirect grey emissions of the goods in t CO₂/MWh electricity or in t CO₂/t type of goods;

• The carbon price due in the country of origin for gray emissions of the imported goods for which the deduction or another form of compensation applies upon export.

From 2026, importers will have to purchase and surrender CBAM certificates that correspond to the gray emissions of the imported goods. From 01.01.2025, only approved CBAM applicants will be allowed to import CBAM goods into the EU. In future, importers will require a CBAM declarant license to import CBAM goods into the EU. A CBAM register is to be set up for customs authorities and the competent authorities of the member states so that authorized CBAM declarants can submit the certificates. The CBAM declaration must then be drawn up by May 31 of each year for the calendar year preceding the declaration.

In order to ensure transparency and verifiability, CBAM declarations are to be reviewed by accredited auditors in future. The EU Commission regularly monitors the effectiveness and functioning of CBAM.

Small quantities of imported goods that fall within the scope of the CBAM Regulation can automatically be treated as exempt from the CBAM Regulation, provided that the de minimis exception applies. In this case, there is no obligation to notify. The de minimis exemption applies to shipments where the total value of the CBAM goods does not exceed EUR 150. Therefore, the total value of CBAM goods in a shipment must be considered and if this value is above EUR 150, the de minimis exception does not apply. If no CBAM goods are imported (i.e. released for free circulation) in a particular quarter, no CBAM report needs to be submitted for that quarter.

The CBAM ensures that the same carbon price is paid for GHG emissions from certain imported goods as in the EU ETS. This means that imports into the customs territory of the Union are charged the same price that would have been charged if the goods had been produced in the EU ETS. The introduction of the CBAM is part of a broader approach to tackling climate change and promoting sustainable production and trade practices within the EU.