The CBAM set up and impacts
What does CBAM refer to?
The Carbon Border Adjustment Mechanism (CBAM) is designed to enhance the European Union Emissions Trading Scheme (ETS). The EU ETS has functioned as a system for reducing carbon emissions within the European structure. It serves as a regulatory framework for managing the carbon costs associated with facilities in the EU.
The CBAM's objective is to substitute existing mechanisms that deal with the risk of 'carbon leakage' (companies avoiding costs linked to CO2 emissions by relocating production to regions with less stringent regulations than those in the European Union).
In this context, the objective of the Regulation established by the CBAM is to address greenhouse gas emissions (GHG) embedded in the imports of specific goods and products into the EU coming from countries with less restrictive policies towards climate change. This aims to prevent the offsetting of the EU’s efforts to reduce CO2 emissions.
The CBAM, established by the European Commission, will require the submission of a declaration of the emissions embodied in certain imported materials and products. This report shall include those emissions produced during their manufacturing, transportation, installation, maintenance, and end-of-life phases. Subsequently, these imports will be subject to a carbon tax to protect the most vulnerable sectors.
WhIch companies will be impacted?
Initially, the CBAM will be applicable to companies and public authorities that import materials, precursors, or processed products containing cement, iron and steel, aluminium, fertilizers, electricity and hydrogen from outside the EU.
For instance, in Spain, imports of iron and steel from countries such as China or Turkey will be subject to this new emission control mechanism. This will have a significant impact on many sectors of the economy, including construction and automotive industries. The fees imposed by the CBAM will lead to an increase in production costs, affecting competition in both domestic and global markets for companies with higher emission volumes.
How will the phases and application requirements unfold?
1. Transitory phase (October 1, 2023, to December 31, 2025.
- Start collecting the required data as of October 1, 2023.
- Provide the first report in January 2024.
- Annually reporting without paying a financial adjustment based on emissions.
- Use the EU-established calculation method for emissions modelling from January 1, 2025 (although flexibility is granted for alternative methods until then).
- Ensure timely declaration filing to avoid potential fines for non-compliance, ranging from EUR 10 to EUR 50 per tonne of undeclared emissions, in accordance with the EU Consumer Price Index.
2. Full application (Starting January 1, 2026):
- Initiate an import authorization process for these materials and products; only authorized CBAM declarants may proceed.
- Submit an annual report detailing the quantity of CBAM goods imported into the EU in the previous year and the computation of their embodied emissions.
- Pay a fee or financial adjustment based on the report results.
- Obtain emission certificates.
- Expect the inclusion of additional materials, such as organic chemicals or polymers, into the scope during this stage.
3. Future application (by 2030): all products listed in the ETS are planned to be incorporated by 2030, including glass, ceramics and cardboard.
What should be included in a CBAM report?
- The annual declaration must be submitted in a report format incorporating.
- The total imported quantity of each type of goods, expressed in MWh (for electricity) or in tonnes (for other materials).
- The overall quantity of embodied emissions in goods, specified in a tonne of CO2 per MWh of electricity or a tonne of CO2 emissions per tonne of other products.
- Indirect CO2 emissions, calculated according to the methodology established by the CBAM regulation.
- The carbon price in the country of origin for embodied emissions in imported goods.
- The total number of CBAM certificates, representing the entire emission quantity, considering the deduction of the carbon price paid in the country of origin and adjustments to comply with the ETS allowance regulation.
To complete the annual declaration, the report must be certified by accredited verifiers. Furthermore, it must adhere to the principles and contents outlined in the Regulation. Additionally, all verified copies should be submitted along with the report."
How are CBAM reports submitted?
The European Commission aims for a more robust consolidation of governance mechanisms. Consequently, it envisions centralizing the recording reports, which will be appended to the electronic database of the CBAM Transitional Registry by authorized declarants. This online portal offers tools for reporting companies to store information from third-country establishments and their embodied emissions, simplifying future calculations.
How to get ready?
The preparation requires immediate action. The key steps to take are:
- Compile an inventory of corporate emissions considering Scope 1, 2 and 3, and identifying all those imports affected by the CBAM.
- Develop a roadmap for handling the reporting and its verification.
