Carbon Border Adjustment Mechanism

Introduction

Regulation (EU) 2023/956 establishes the Carbon Border Adjustment Mechanism (CBAM), a landmark tool in the European Union's efforts to fight climate change and prevent 'carbon leakage'. Carbon leakage occurs when 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. This Regulation aims to equalize the carbon price between domestic products and imports, ensuring that the EU's climate objectives are not undermined by production relocating to countries with lower ambition.

Main Goal

The primary objective is to reduce global carbon emissions and support the goals of the Paris Agreement by incentivizing third-country producers to reduce emissions. It complements the EU Emissions Trading System (EU ETS) by applying an equivalent carbon price to imports of certain goods.

Who It Applies To

The Regulation applies to importers (Authorized CBAM Declarants) who import specific goods into the customs territory of the Union.

Affected Sectors (Annex I Goods)

The mechanism initially covers specific carbon-intensive sectors:

• Cement
• Iron and Steel
• Aluminium
• Fertilisers
• Electricity
• Hydrogen

It also applies to certain precursors and downstream products (e.g., screws, bolts) made from these materials. The scope includes both direct emissions (from production) and, for certain goods, indirect emissions (from electricity used in production).

Key Provisions

Transitional Period (Oct 1, 2023 – Dec 31, 2025)

• Importers must report emissions embedded in their imports on a quarterly basis.
• No financial adjustment (payment) is required during this phase.
• The goal is to collect data and prepare stakeholders.

Definitive Period (From Jan 1, 2026)

• Importers must be granted the status of 'authorized CBAM declarant'.
• Importers must declare annually the quantity of goods imported and their embedded emissions.
• Importers must surrender CBAM certificates corresponding to the declared emissions. The price of certificates mirrors the weekly average auction price of EU ETS allowances.

Obligations & Requirements

1. Authorization: Before importing goods in the definitive period, importers must apply for authorization via the CBAM registry.
2. Calculation: Determining embedded emissions (direct and indirect) using specific methodologies (actual data preferred; default values used only when actual data is unavailable/unverified).
3. Verification: Emissions declarations must be verified by an accredited verifier.
4. Surrender of Certificates: Purchase and surrender certificates to cover the verified emissions.
5. Record Keeping: Maintain records of information used to calculate emissions for four years.

Exemptions

• De Minimis: Consignments with an intrinsic value not exceeding €150.
• Military Use: Goods moved or used in the context of military activities.
• Geographic: Goods originating in Iceland, Liechtenstein, Norway, Switzerland, and certain territories (Büsingen, Heligoland, Livigno, Ceuta, Melilla).

Penalties

• Failure to Surrender Certificates: A penalty of €100 per tonne of CO2 (indexed to inflation) for each certificate not surrendered, plus the obligation to surrender the missing certificates.
• Reporting Failures: During the transitional period, penalties apply for incomplete or incorrect reports (ranging between €10 and €50 per tonne of unreported emissions).