Navigating the Carbon Border Adjustment Mechanism (CBAM)

What Importers Need to Know

Climate change is no longer a distant threat but an alarming reality that humanity must address. As nations worldwide commit to reducing carbon emissions, the European Union (EU) has announced a new policy measure called the Carbon Border Adjustment Mechanism (CBAM). The CBAM is a proposed legal framework that aims to create a level playing field for EU businesses while incentivising global companies to reduce their carbon footprint.

Why did the EU create a Carbon Border Adjustment Mechanism?

The EU has long been a leader in climate policymaking, and the CBAM is part of its overarching goal to reduce greenhouse gas emissions by 55% by 2030 and achieve carbon neutrality by 2050. The new measure responds to concerns that EU domestic industries may be disadvantaged by the lower carbon footprint requirements imposed on them. At the same time, non-EU competitors are held to a different standard. The CBAM is also intended to prevent carbon leakage, which occurs when businesses relocate to countries with more lenient climate policies, resulting in emissions being transferred rather than reduced.

How will the Carbon Border Adjustment Mechanism work?

Under the CBAM, EU importers of selected goods would be required to purchase carbon permits to cover the emissions associated with those items. The CBAM will apply to goods produced in countries not covered by the EU Emission Tracking System (ETS). The mechanism will attribute a carbon value to goods imported into the EU based on the emissions associated with their production, thereby adding a carbon cost to these products. This cost will be calculated based on carbon prices that apply to the production of goods within the EU, and compliance with the CBAM will be through allowances or certificates equivalent to the carbon cost levied on imports. The CBAM also encourages non-EU businesses to reduce their carbon footprint to avoid additional fees.

Starting October 1, 2023, importers of specific goods with high carbon production and those at risk of carbon leakage must disclose GHG emissions in their imports. This disclosure requirement does not require any financial payments at this stage. In 2026, the transitional period will conclude, and importers must make necessary payments. The scope of CBAM may extend, leading to more goods being subject to the mechanism.

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The Transition Period: A Time for Preparation

The transition period for CBAM is a critical phase for importers. It’s a time when the new rules are gradually introduced, allowing businesses to adapt to the new carbon pricing landscape. The specifics of this period may involve financial penalties for non-compliance or specific carbon pricing protocols that affect the cost of imports. During this time, importers should take proactive steps to understand the new regulations, assess their potential impact, and strategise accordingly.

To assist importers in calculating and reporting emissions during the CBAM transitional period, the European Commission has created comprehensive guidance, IT tools, tutorials, and training materials. These resources can be accessed on the European Commission’s website. Importers must gather emissions data starting from the fourth quarter of 2023, but they have until the end of January 2024 to submit their reports.

CBAM Post-2026: A New Era for Global Economies

The new permanent system, which starts on January 1st, 2026, requires importers to report the amount of goods imported to the EU in the previous year and data on their emissions. This will usher in a new era for global economies. With the full implementation of CBAM, the EU aims to increase ambition within its Emissions Trading System (ETS), impacting the future carbon price pathway. This move could have significant implications for importers, especially those dealing with carbon-intensive goods. Therefore, importers must stay informed and adapt to these changes promptly.

Importers must submit accurate CBAM certificates or face fines of 100 euros per tonne of CO2 equivalent. Non-CBAM declarants may face penalties three to five times higher depending on the severity, duration, scope, intent, and repetition of non-compliance.

Which sectors will the new mechanism cover, and why were these chosen?

Initially, the CBAM will only apply to specific sectors at high risk of carbon leakage and are particularly exposed to international competition. These include:

  • Cement
  • Fertilisers
  • Iron and steel
  • Aluminium
  • Electricity
  • Hydrogen
  • Certain products made from iron and steel, such as screws and nails, are considered downstream products.

 These industries are highly energy-intensive and responsible for significant global greenhouse gas emissions. The CBAM’s inclusion of these sectors is a strategic move by the EU to signal its intention to fight climate change and demonstrate its commitment to upholding high environmental standards.

What specific information does each CBAM-covered industry need to report? 

 Each industry covered by the CBAM will need to report specific information, including the carbon emissions generated during production. The precise scope of information required has yet to be confirmed but is likely to include data on energy usage, production volumes, and carbon abatement technologies. The responsibility for reporting will be on the exporting companies, who will be required to submit information to the EU authorities responsible for administering the CBAM. Reporting obligations are expected to increase over time as the CBAM expands to more sectors.

Challenges and Considerations for Importers

While CBAM presents opportunities for a more sustainable global trade system, it also challenges importers. One key consideration is compliance with emissions reporting and auditing. Importers must adhere to these new protocols to avoid penalties and maintain their market position.

Importers should also consider investing in low-carbon technologies and reviewing their supply chains to reduce their carbon footprint. This strategy could provide a competitive advantage in the new trade landscape shaped by CBAM.

The Role of Sustainability Professionals in Preparing for the Carbon Border Adjustment Mechanism

 Sustainability professionals, facility managers and other stakeholders can be essential in preparing and supporting their respective organisations in complying with the CBAM. This includes providing technical expertise in calculating the carbon footprint of products, assessing the impact of the CBAM on operations, and developing a roadmap for transitioning to more sustainable production methods. These professionals can also work with suppliers to help them prepare for the effects of CBAM implementation on the supply chain.

What about Faradai? 

Faradai has developed the Net-Zero Intelligence Platform, which enables the integration of sustainability and decarbonisation. Our primary objective is to assist you in assessing the risks and opportunities associated with your business. We offer comprehensive support in calculating, managing, and reporting your carbon footprint and reducing electricity emissions, ensuring conformity with CBAM regulations. The decarbonisation solution is designed to identify energy inefficiencies in IoT infrastructure, enabling real-time monitoring and resulting in substantial cost savings of up to 15% and operational efficiency gains of up to 60%. By leveraging our solution, organisations can optimise energy usage without compromising performance or reliability.

If you are inspired to reduce your company’s carbon footprint, Faradai Net-Zero Intelligence Platform can assist.  

Sign up for a 30-day free trial here.

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