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On 17 August 2023, the European Commission adopted the final implementing rules of the so-called Carbon Border Adjustment Mechanism (CBAM) for the initial transitional phase, which starts on 1 October 2023 and runs until the end of 2025, with carbon tax payment obligations to be started as of 2016.
CBAM formally entered into force on 17 May 2023. It requires importers to report the so-called “embedded emissions” of certain (mostly industrial) products and of electricity imported to the EU to ensure equivalent “carbon pricing” for imports and domestic (i.e., EU) products and electricity.
As part of the EU’s Green Deal, CBAM aims to stop the so-called “carbon leakage,” a trend under which European manufacturers might relocate their factories to third countries where they can produce more cheaply in the absence of strict EU environmental and climate regulations (but in full compliance with international trade rules) by practically introducing a carbon tax system of non-EU, carbon-dioxide emission heavy products — such as iron and steel, cement, fertilizer, aluminum — and electricity generation when entering the EU. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country (if any), the corresponding cost can be fully deducted for the EU importer.
The gradual introduction of the CBAM is aligned with the phase-out — between 2026 and 2034 — of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonization of EU industry, as follows: On 1 October 2023, a transitional phase of the CBAM will start, during which transitional period — and by the end of 2025 — stakeholders will be required to provide information, without any associated financial adjustments, and to report on products the production of which involves high carbon dioxide emissions and therefore a high risk of carbon leakage.
The newly introduced Implementing Regulation on reporting requirements and methodology provides for some flexibility when it comes to the values used to calculate embedded emissions on imports during the transitional phase. During the first year of implementation, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method), (b) reporting based on equivalent third-country national systems, or (c) reporting based on reference values.
As of 1 January 2025, only the EU method will be accepted. As of 1 January 2026, following the final introduction of CBAM, importers will be required to report the volume of goods imported into the EU in the previous year, as well as their greenhouse gas emissions, and to “pay” the carbon (border) tax via the corresponding number of CBAM certificates.
Click here to read the original article published by Ally Law member firm KCG Partners.
