Carbon Border Adjustment Mechanism (CBAM) update

The Carbon Border Adjustment Mechanism (CBAM) being introduced by the European Union is aimed at solving the issue of carbon leakage in the EU's carbon market. The system strives to guarantee that imports from countries with lower environmental standards do not compromise the EU's climate ambitions.

Carbon leakage refers to the situation where companies shift production to countries with weaker environmental regulations to avoid carbon pricing. As a result, more emissions are created from the same items in other nations, increasing global emissions. As a remedy, CBAM imposes a carbon price on imported goods that are equal to the price set by the EU's emissions trading scheme (ETS).

CBAM targets specific industrial sectors severely affected by carbon leakage, such as cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen. This applies to both imports and domestic production and ensures a level playing field for European industry.

The EU Commission, on 13 June 2023, released its draft Carbon Border Adjustment Mechanism (CBAM) Implementation Regulation.

The Regulation focuses on the reporting obligations during the transitional period that is 1 October 2023 to 31 December 2025. Each report is to contain the following:

• Quantity of the imported goods
• Direct and indirect emissions embedded in them
• Any carbon price effectively paid abroad for those emissions (including precursor materials)

The first report is to be submitted by 31 January 2024 in respect of Q4 transactions which take place in 2023.

The reporting declarants, in the form of direct or indirect representations on behalf of the importer, will be able to access the reporting interface via the CBAM Transitional Registry.

The draft Regulation was open for feedback from 13 June 2023 – 11 July 2023 and comments raised are to be used to shape the final version of the Regulation.

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