The EU Regulation establishing a carbon border adjustment mechanism (CBAM) is designed to drive businesses to achieve a true global reduction in greenhouse gas (GHG) emissions instead of relocating carbon-intensive production to countries with lower carbon prices. It places direct obligations on EU and non-EU importers of in-scope goods, and also has impacts on EU and non-EU producers.

Having commenced its transitional phase on 1 October 2023, the true extent of the regulation’s impact on businesses, in terms of decarbonisation strategies, compliance costs, supply chain changes, contractual amendments and more, will be felt more acutely over time. The regulation initially imposes reporting obligations on in-scope entities, but after its transitional phase it will additionally impose a price on the embedded GHG emissions of in-scope products imported from non-EU countries.

Key milestones of the regime are outlined below.

• The regulation came into force on 17 May 2023 and currently applies to goods in a select number of sectors (cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen). Over the next two years the European Commission is due to report on extending its scope to include goods further down the value chain, as well as other items at risk of carbon leakage such as organic chemicals and polymers.
• The transitional phase of the regulation runs from 1 October 2023 to 31 December 2025. During this period, importers of in-scope goods are required to submit reports for each quarter. The first CBAM reports for Q4 2023 are due by 31 January 2024. The reports must detail the quantity of each type of in-scope good being imported, the embedded GHG emissions released during the production process of the goods, and any carbon price due for those emissions in their country of origin. More rules on the calculation of embedded emissions, the use of estimated values and the reporting of carbon prices are set out in the Implementing Regulation of 17 August 2023.
• From 1 January 2026, only authorised CBAM declarants can import in-scope goods into the customs territory of the EU. These importers will be required to submit an annual CBAM declaration and to purchase and surrender CBAM certificates that correspond to the reported embedded emissions. The price of CBAM certificates will align closely with the price of EU Emissions Trading Scheme (ETS) allowances, expressed in euros per ton of CO2 emitted. The European Commission is due to clarify how the annual average carbon price effectively paid elsewhere by an importer should be converted into a corresponding reduction in the number of CBAM certificates to be surrendered.
• In the period 2026-2034, the phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of payments via CBAM certificates. Together, the CBAM and EU ETS should drive domestic producers and businesses selling in-scope goods into the EU to lower their embedded emissions, or pay the price of costly EU ETS allowances or CBAM certificates.
• Penalties will arise in multiple scenarios, including for importing in-scope goods without authorisation, failing to comply with reporting obligations and failing to surrender the correct number of CBAM certificates by 31 May each year.

Ultimately, the EU CBAM aims to level the playing field between EU producers and non-EU producers from countries with less stringent carbon pricing policies, address the risk of carbon leakage, and incentivise EU and non-EU producers to reduce GHG emissions.

To understand how the EU CBAM may impact your business, please refer to our article (‘CBAM - how the EU's new carbon border tax will impact non-EU businesses’) and podcast (‘Regulatory developments in carbon leakage and carbon border adjustment mechanisms’), or get in touch with us to discuss.