The deadline for CBAM is rapidly approaching – and companies need to understand their obligations. Our ESG team highlights five steps to help prepare.
What is CBAM?
As the European Union (EU) works to meet its greenhouse gas emissions reduction targets under the Paris Agreement, an emerging risk is that some companies might move carbon-intensive production abroad, which could lead to carbon leakage.
The EU’s new Carbon Border Adjustment Mechanism (CBAM) seeks to prevent that leakage by mandating companies to pay for the embedded carbon emissions generated during the production of certain goods imported into the EU. Basically, CBAM applies the carbon costs charged for EU-produced products to imported products as well. This requirement would discourage companies from moving their production to a country where carbon emissions costs are lower or nonexistent.
The transitional phase for CBAM started on Oct. 1, 2023. The first reporting phase for importers covers the fourth quarter of 2023, with submissions due on Jan. 31, 2024. During this transitional phase, CBAM will apply to key carbon-intensive goods (iron, steel, cement, aluminum, fertilizers, electricity, and hydrogen), including certain precursors and a limited number of downstream products.
The transitional phase, which runs through the end of 2025, will serve as a pilot period for all stakeholders to implement key takeaways before the definitive period starts in 2026. Following the transitional phase, additional products will be determined to be in scope with a goal of all EU Emissions Trading System (ETS) goods to be included by 2030.
After 2026, importers must purchase CBAM certificates and surrender the appropriate number of them to cover the corresponding emissions of imported CBAM products each year. The European Commission will determine the price of CBAM certificates, which will be tied to the price of ETS auctions. During the transitional phase, importers of CBAM goods will be required to submit quarterly reports but will not yet be required to purchase CBAM certificates.
