Understanding the EU Carbon Border Adjustment Mechanism (CBAM): Complete Scope Guide and Implementation
Credit: Freepik
As the world races to address climate change, the European Union has taken a bold step with its Carbon Border Adjustment Mechanism (CBAM).
Introduced in October 2023, this regulation aims to prevent carbon leakage - a challenge that occurs when companies move their production outside the EU to avoid strict environmental standards.
The CBAM regulation works alongside the EU ETS (Emissions Trading System) by effectively placing a carbon price on imported goods, ensuring fair competition between EU and non-EU manufacturers.
For businesses dealing with imports from outside the EU, understanding the scope of the CBAM is highly important.
The mechanism introduces new requirements, including CBAM certificates and detailed emissions reporting, which directly impact procurement strategies and bottom lines.
In this article, we'll guide you through everything you need to know about CBAM. From its fundamental concepts and scope to practical implementation steps, including how to manage reporting requirements, secure CBAM certificates, and adapt your procurement strategy for long-term success.
What is the EU CBAM? A comprehensive overview of Carbon Border Adjustment
The Carbon Border Adjustment Mechanism (CBAM), is a policy tool adopted by the EU to prevent carbon leakage and support the EU’s climate goals under the European Green Deal.
Carbon leakage occurs when companies relocate production to countries with less stringent emissions constraints, leading to no net reduction in global emissions.
CBAM addresses this by placing a carbon price on imports of certain good into the EU, effectively equalizing the cost of carbon between domestic products and imports.
By aligning carbon costs, CBAM encourages producers to adopt cleaner technology and reduces the competitive disadvantage faced by EU companies adhering to the ETS cap.
CBAM's extensive scope and carbon emission requirements
Companies within and outside the EU
CBAM affects both EU-based importers, and non-EU exporters.
EU importers are responsible for ensuring compliance by declaring the embedded emissions in their imported goods and purchase corresponding CBAM certificates.
Non-EU producers indirectly will feel the impacts as they will be subject to carbon pricing upon EU-market entry.
Affected sectors and goods
The initial scope of CBAM covers sectors that are trade exposed and emissions intensive, where carbon leakage is highest. This includes:
- Cement
- Iron and Steel
- Aluminum
- Fertilizers
- Electricity
- Hydrogen
Embedded emissions within scope
Credit: European Comission
CBAM requires reporting and pricing of direct emissions embedded in the imported goods. The emissions are from the production processes of the goods, measured in tons CO2e per ton of product.
To ensure your products comply, you can find the specific emission requirements for each sector and product category here.
Importers must calculate the emissions based on primary data from the production processes. If data is not available, default values provided by the EU must be used, which are intentionally conservative to encourage the use of actual emissions data.
CBAM transitional phase: Timeline and key milestones from 2023 onwards
CBAM has been in its transition phase since October 1, 2023, and will enter into full implementation January 1, 2026.
Importers must submit an annual CBAM declaration by May 31 of each year, detailing the quantity of goods imported and their associated embedded emissions for the previous calendar year.
Failure to comply can result in penalties similar to those under the ETS, which ranges from EUR 10 to EUR 50 per ton of unreported emissions. Pricing will be linked to the EU ETS based on the average auction price.
Your journey to reduce carbon emissions under CBAM
1. Determine applicability and the scope on your products
Credit: DHL
Assess whether your company imports goods into the EU that fall under the scope of CBAM. Review the product classifications and verify if they match the Harmonized System (HS) codes specified in the regulation.
2. Understand reporting requirements and deadlines
Familiarize yourself, if not already, with the reporting obligations during the transition phase and full implementation. Note the quarterly reporting deadlines during the transition and annual declaration requirements thereafter. This is important to not be caught off guard.
3. Implement data management system
Develop, upgrade or purchase a data management system(s) to accurately track, record and archive embedded emissions in your imported products.
Ensure that the system(s) can accurately handle the granularity of data required, including information relating to production processes, geography and emissions factors.
4. Collect data from necessary suppliers
Engage with suppliers to obtain necessary emissions data. This may include:
- Requesting detailed emissions reports.
- Requesting protocols for production
- Verifying data accuracy through audits or third party certifications
- Establishing contractual obligations for data provisions
5. Prepare for purchase of CBAM certificates
Plan financially and administratively for procurement of CBAM certificates starting in 2026. Monitor the EU ETS carbon prices to anticipate costs and budget accordingly.
6. Monitor carbon prices on national ETS’ your supply chain operates in
If suppliers are located in countries with their own ETS’, or have other carbon pricing mechanisms - remember to monitor these prices. Credits for carbon prices paid in the country of origin may be considered under CBAM, potentially lowering your certificate obligations.
7. Prepare for next reporting period
Establish a continuous improvement process to refine data collection, reporting accuracy and compliance procedures. Stay up to date with regulatory changes and prepare to adapt your strategies accordingly.
Beyond EU member state compliance: Strategic impact
Setting a carbon price
CBAM effectively sets a carbon price on imported goods, internalizing the environmental cost of emissions. This in turn will encourage companies to reduce their carbon footprint and can stimulate innovation in low carbon-technologies and processes.
Consider utilizing the carbon price to engage in supplier development, to lower embedded emissions within your supply chain and direct suppliers to reduce CBAM compliance costs in the future.
Strategic procurement
Understanding the carbon intensity of your supply chain can inform procurement decisions. Companies who opt to source materials from suppliers with lower emissions, or in countries with higher costs on carbon will see a lower cost of CBAM compliance.
Make sure to look at the bigger picture when doing procurement past 2026. This is an exercise that can be done now to give your company a cutting edge in the future.
Preventing carbon leakage: What you can do
The introduction of CBAM marks a significant shift in trade dynamics.
While the regulation presents very clear compliance challenges, it offers an opportunity for companies to gain a competitive edge.
By proactively adapting to CBAM, businesses can not only ensure compliance when the time comes, but save on costs where others may be caught off guard.
Starting your CBAM journey today will position your company at the forefront of sustainability, ready to navigate the complex evolving compliance landscape.