The EU has introduced the world’s first carbon border tax.
The Carbon Border Adjustment Mechanism (CBAM).
CBAM’s introduction is a significant moment in the history of carbon pricing. Like the Plastics tax by putting a price on carbon, it becomes a significant risk, something that will trigger individual companies, industries, and countries to try and avoid.
The ambitions of the policy are high as it aims to tackle carbon leakage resulting from the EU Emissions Trading Scheme, whilst at the same time incentivising international partners and countries to take climate action. This is wholly aligned with longer term aspirations to reach Net Zero.
What is the aim of CBAM?
CBAM is a price adjustment mechanism applied to imports into the EU for designated goods based on their CO2 emissions in the production process outside the EU. The aim of CBAM is to prevent the risk of carbon leakage.
Its aim is to reduce carbon emissions and is a landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
Why another piece of regulation?
Mainly to address an issue called ‘carbon leakage’ or offshoring emissions. This happens when companies transfer the production of goods to countries with lower emissions standards, often leading to an overall increase in emissions.
When is this likely to be implemented?
It came into force on 1st October 2023.
Phased in over the next three years and initially to be focussed on high emitting sectors like cement, fertilizers hydrogen electricity along with metals iron, steel and aluminium.
This initial trial phase is focused on high emitting sectors, after this, CBAM will be gradually ramped up to include more sectors, until it comes into full force from 1 January 2026. Only then will the carbon price be charged.
The tax will enable the EU to match the carbon price of imports with that of domestic goods. It is intended that this mechanism will create a level playing field, bolster industry decarbonisation, and apply a carbon price to goods entering the Union.
What does this mean for carbon markets?
There is still uncertainty as to what the final version of CBAM will look like. Regardless, the tax will have far reaching implications for international markets and companies conducting trade across EU borders. Globally, it will mean a significant ramp-up of emissions reporting and associated paperwork.
Verified product carbon footprints are expected to be a requirement for CBAM certificates. Therefore, offering a verified low carbon product will likely create a strong competitive advantage for companies supplying to the EU.
What will companies need to do?
From 1 October 2023 to 31 December 2025, companies importing goods into the EU will have to declare, in quarterly reports, the total volume of products imported and the quantity of emissions embedded within each product. This includes both direct and indirect emissions.
From 1 January 2026, applicable companies will need to purchase the equivalent number of CBAM certificates to cover these “embedded” emissions. If importers can prove a carbon price has already been paid during production, the tariff is likely to be reduced to avoid double taxation.
Overall, this will mean:
- Companies importing goods into the EU will need to work with their suppliers to gather necessary data. For example, asking for the upstream emissions or carbon footprints of each product or material.
- Companies importing goods into the EU will need to quantify the financial risk of CBAM and impact of importation, then weigh up the pros and cons of production locations.
- Importers will need to consider the advantages and disadvantages of choosing low emitting suppliers outside of the EU, or potentially relocating manufacturing to inside the EU.
- Suppliers providing raw materials or goods to the EU will need to provide emissions data or carbon footprints on products.
How can EU companies prepare for CBAM?
Although CBAM will not be implemented in full until 1 January 2026, companies can prepare in advance by:
- Carrying out a scenario analysis to identify emissions related to CBAM-applicable imported goods and their likely impact.
- Engaging with suppliers and manufacturers to gather emissions data for imported goods.
- Engaging climate risk associates to calculate the tonnage of products and the resulting carbon price. This will determine how CBAM is likely to financially impact the company.
- Ensuring the company is registered for importing with relevant regulatory bodies.
- Assess if goods are already carbon priced in the country of production or purchase to avoid double pricing.
- Establishing processes to collect emissions data, then systems to report and process payments according to CBAM’s regulations.
For large organisations with multiple entities or teams, engaging a third party not only provides consistency of data collection it also demonstrates authenticity of the data reported.
How can MPkgS help?
To get ahead of the changing compliance landscape, our team can help by pointing you towards businesses to navigate the risks and opportunities surrounding CBAM.