CBAM – a mechanism for adjusting border prices with CO2 emissions in mind

CBAM

CBAM(Carbon Border Adjustment Mechanism) is the EU’scarbon-price adjustment mechanism. It serves to ensure fair pricing of carbon emissions during the production of goods and their entry into the EU, and to encourage cleaner industrial production in non-EU countries.

CBAM – rules applicable during the transition period

On August 17, 2023. The European Commission has adopted rules governing implementation (CBAM) during the transition period, which begins on October 1, 2023. and will last until the end of 2025. The published Executive Order specifies the reporting obligations applicable to EU importers of CBAM goods during the transition period, as well as the methodology for calculating embedded emissions released in the production of CBAM goods.

During the transition period, traders will only report on embedded emissions related to imports of CBAM goods, without paying financial compensation. This will give companies time to prepare, plan and refine their methodologies until 2026.

The gradual introduction of the mechanism will allow for a prudent, predictable and proportionate transition for EU and non-EU companies, as well as to accommodate the phasing out of free allowance allocations under the EU ETS. The relinquishment of entitlements will take place in parallel with the introduction of CBAM in 2026-2034.

Implementation of CBAM rules

The Carbon Border Adjustment Mechanism will initially apply to certain commodities and selected precursors whose production is carbon intensive and carries the highest risk of overruns: cement, iron and steel, aluminum, fertilizers, electricity and hydrogen. With this expanded scope, CBAM will eventually affect – once fully implemented – more than 50 percent. emissions in the sectors covered by the ETS.

To help importers in the EU, as well as producers in third countries, adjust to the new rules, the Commission has published guidelines on the practical aspects of their implementation. At the same time, special IT tools are being developed to help importers make and report calculations. Training materials, webinars and manuals are also being developed to help companies during the transition period. Although importers are required to collect data for the fourth quarter as early as October 1, 2023, the first report is not due until the end of January 2024.

The implementing regulation on reporting requirements and methodologies during the transition phase provides flexibility with regard to the values used to calculate embedded emissions from imports. In the first year of implementation, companies will have three ways to choose:

  1. Full reporting in accordance with the new methodology (EU method);
  2. Reporting based on equivalent national systems of third countries;
  3. Reporting based on reference values.

As of January 1, 2025. Only the EU method will be accepted.

The role of CBAM system implementation

CBAM is one of the main pillars of the EU’s ambitious “Ready for 55” program and a groundbreaking EU tool to combat runaway greenhouse gas emissions. Carbon leakage occurs when EU-based companies move carbon-intensive production abroad to take advantage of lower standards, or when EU products are replaced by imports with higher carbon emissions in the production process, which in turn undermines the effects of our climate action.

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