What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy instrument designed to support the European Union's climate ambitions, aimed at significantly reducing greenhouse gas emissions by at least 55% by 2030 and achieving climate neutrality by 2050 at the latest.
The CBAM is an innovative regulatory instrument implemented by the European Union and gaining worldwide influence to combat carbon leakage. It aims to ensure that imported goods are subject to a carbon price equivalent to that of domestic production in the EU. Carbon leakage occurs when industries move production to regions with less stringent environmental regulations to avoid the cost of carbon pricing, thereby undermining the effectiveness of emission reduction efforts in the EU. CBAM aims to remedy this by imposing a carbon price on goods imported into the EU based on the emissions associated with their production, thus ensuring fair competition between domestic and foreign producers.
Where can I find out more about CBAM?
1. CBAM in 60 seconds
2. 10-minute quick start - Introduction to CBAM
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_de#resources
3. 45-minute online course - CBAM specifics for each sector
https://customs-taxation.learning.europa.eu/course/view.php?id=770§ion=1
4. EU CBAM regulations
5. Guidance document on CBAM implementation for importers of goods in the EU
https://taxation-customs.ec.europa.eu/system/files/2023-08/CBAM%20Guidance_EU%20importers_0.pdf
6. Provisional list of competent national authorities for CBAM
Do your products fall under the CBAM regulation?
In the first phase, CBAM targets products from six sectors (cement, hydrogen, fertilizers, iron and steel, and aluminum) at high risk of carbon leakage, including certain precursors and downstream products. In a second phase, CBAM will be extended to other sectors:
- CEMENT
- FERTILIZERS
- IRON AND STEEL
- ELECTRICITY
- ALUMINIUM
- HYDROGEN
Check whether the goods you are importing are listed in Annex I of the CBAM regulations.
The Combined Nomenclature (CN) classification system defines the essential characteristics of goods and is used to identify CBAM sector goods.
The CN product specification classification system consists of two parts: firstly, a numerical numbering system with 4, 6 or 8 digits, reflecting different levels of product disaggregation, and secondly, a short textual description of each product category giving its essential characteristics. The first six digits are identical to the Harmonized System (HS) classification used in international trade, and the remaining two digits are additions specific to the EU.
If in doubt, contact the National Competent Authority (NCA) for CBAM in the country where you are established.
For more information on how the MyTower GTM classification solution can help you automate the classification of your products, please visit https://fr.mytower.co/.
What are the key principles of the CBAM framework?
The CBAM framework is based on four key principles:
1. Carbon pricing
CBAM introduces a carbon price on imported goods based on their embodied carbon emissions. This price is designed to be aligned with the carbon pricing mechanisms in place in the importing country. It effectively makes importers responsible for the emissions associated with the production of the goods they import into Europe.
2. Calculating carbon emissions
To calculate the carbon content of imported goods, CBAM relies on a robust methodology that takes into account the product's entire life cycle. This includes emissions from manufacturing, transport and other relevant stages. The aim is to provide a fair assessment of the carbon footprint associated with each product.
3. Compliance and reporting
Importers are required to declare the carbon content of the goods they import into the country. This declaration is subject to verification and audit to ensure accuracy and prevent abuse of the system.
4. Border adjustment
The CBAM mechanism includes a border adjustment, whereby importers must pay a carbon tax if the carbon content of their goods exceeds the established threshold. This tax is designed to level the playing field for domestic producers subject to carbon pricing in their home countries.
Consult the European Commission's useful document (pdf) on the implementation of CBAM for importers of goods into the EU via https://taxation-customs.ec.europa.eu/system/files/2023-08/CBAM%20Guidance_EU%20importers_0.pdf
CBAM's impact on global supply chains
CBAM is not limited to a single country or region. It aims to become a global standard for tackling carbon leakage and promoting fair competition between industries worldwide. Several major economies, including the European Union, have already made significant progress in implementing CBAM legislation.
What are the advantages of CBAM?
- Reducing emissions: By encouraging carbon reduction throughout the supply chain, CBAM contributes to global efforts to reduce emissions.
- Fair competition: domestic industries are no longer at a disadvantage compared with foreign competitors who are not subject to the same carbon pricing.
- Income generation: Income generated by CBAM can be reinvested in climate-related projects and initiatives.
- Global collaboration: CBAM encourages international cooperation on climate action and aligns trade policies with environmental objectives.
What are the challenges facing CBAM?
CBAM's disruptive effect on global industrial value chains
The adoption of CBAM will have significant implications for industrial supply chains. This will affect not only producers of covered goods, but also industries up and down the value chain, such as the automotive, construction and manufacturing sectors. Customers will now be looking for green or recycled steel and eco-friendly cement, increasing competition for access to low-carbon materials and products, boosting their demand. As the cost of carbon-intensive products rises, companies may need to adjust their business models, supply chains and operations to reduce their carbon footprint.
While CBAM offers promising prospects, it also presents challenges. Implementing a global system requires coordination, transparency and robust verification mechanisms to ensure its effectiveness and prevent trade conflicts. Moreover, concerns remain about the potential impact on developing economies. CBAM must be implemented in a way that balances the need to reduce emissions with the need for economic development in these regions.
Several industries and international organizations such as the World Trade Organization (WTO) and the United Nations Framework Convention on Climate Change (UNFCCC) have published position papers or statements on CBAM.
Check out their latest opinions and concerns directly on their website for the most up-to-date information, such as these:
Energy sector :
Automotive industry :
https://www.acea.auto/publication/position-paper-carbon-border-adjustment-mechanism
Chemical industry :
Agricultural and food industries :
https://www.cema-agri.org/images/publications/position-papers/CEMA_Position_on_CBAM_2021.pdf
When does CBAM come into force?
CBAM will be implemented in two distinct phases:
CBAM transition phase
The CBAM transition phase began on October 1, 2023 and will end on December 31, 2025.
Your first report must be submitted by January 31, 2024.
During this phase, reporting is the primary requirement, and there is no obligation to purchase CBAM certificates.
What do you have to declare?
- The quantity of imported products.
- Direct and embodied carbon emissions.
- Carbon costs incurred in the country of origin.
What steps can you take to prepare for your reporting obligations (from October 2023)?
- Appoint an internal cross-functional project team to assess the impact of CBAM on your organization, i.e. legal aspects, product regulations, hygiene, health and safety, customs, supply chain, purchasing, etc.
- Use the CBAM checklist for EU importers as a tool to get your project off the ground
https://taxation-customs.ec.europa.eu/system/files/2023-10/CBAM%20checklist%2002-10.pdf
- Determine whether any of your goods will be affected by CBAM regulations - they're all linked to your customs commodity codes, so it's essential to classify your goods correctly to avoid potential problems.
- Inform your suppliers of changes and reporting requirements
- Keep an eye on product-specific regulations governing the calculation of embodied carbon.
- Check that your supplier information is accurate before the start of the CBAM transition phase in October, to ensure that you have complete and reliable data right from the start.
- Make sure you have a valid EORI number.
CBAM operational phase
The operational phase of CBAM will begin on January 1, 2026, at which point the full carbon border adjustment mechanism will come into effect. You will be required to make an annual declaration to the Commission, either directly or via a CBAM-authorized declarant.
Your first annual declaration must be submitted by May 31, 2027.
Conclusion
As the world grapples with the urgent need to mitigate climate change, innovative approaches and instruments such as CBAM are becoming increasingly essential. CBAM represents a transformative change in the way we address carbon emissions on a global scale, with the potential to revolutionize the way industries operate and compete.
While challenges remain, the promise of CBAM lies in its ability to align economic incentives with environmental goals, fostering a more sustainable and equitable future for all. As countries and industries continue to adopt and refine CBAM policies, it is clear that this mechanism will play a crucial role in the transition to a greener, more responsible global economy.
Written by Delphine Neveux
Vice President Global Trade Management, MyTower
