The EU has set ambitious goals to reduce greenhouse gas emissions by at least 55% by 2030 and achieve climate neutrality by 2050. The CBAM is designed by the EU to impose a carbon tariff on selected imports, aiming to prevent carbon “leakage” and encourage emission reduction measures outside the EU. By ensuring that EU emission reductions contribute to a global decline in emissions, the CBAM aligns with the EU's climate mitigation objectives while seeking to adhere to World Trade Organization rules.

The EU signed the CBAM Regulation in May 2023, with its transitional phase set to commence on 1 October 2023. Initially, the CBAM will apply to specific goods and precursors associated with carbon-intensive production, being cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. However, this list will be subject to change as the CBAM progresses.

The CBAM's implementation will occur gradually, allowing for a careful transition for businesses within and outside the EU. During the transitional period, importers will be required to report greenhouse gas emissions embedded in their imports without making financial payments or adjustments. This phase aims to gather valuable information on embedded emissions and refine the methodology for calculating emissions during the definitive phase.

The reporting scope will expand to include indirect emissions after the transitional period for certain sectors, such as cement and fertilisers. From 1 January 2026, importers will need to declare the quantity of goods imported and their embedded greenhouse gas emissions annually, surrendering the corresponding number of CBAM certificates. The price of these certificates will be determined by the weekly average auction price of EU ETS allowances.

While the New Zealand Government has not to date committed to a CBAM, it is crucial for industries that may be impacted to closely monitor developments in the EU and other countries, such as Australia (the Australian Federal Budget 2023-2024 released on 9 May 2023 outlined that the Government will allocate AU$3.9 million over two years for a review of policy options to reduce carbon leakage, including CBAM – refer here for Deloitte Australia's article released earlier this year for more information).

The adoption of a similar mechanism in New Zealand could also result in tariffs being imposed on carbon-intensive imported goods. New Zealand businesses should assess how such a mechanism might affect their supply chain and import profiles.

To prepare for potential changes, New Zealand businesses should proactively assess their reporting processes and explore digital solutions that align with a potential CBAM or similar mechanism in the future. Implementing a CBAM or similar measures requires an accurate calculation of carbon footprints throughout the supply chain, which demands technical expertise and robust data collection.

It is also important that New Zealand businesses trading in affected commodities closely review their tariff classifications and the origin of the goods. This evaluation will help determine whether the goods traded would fall under the CBAM regime.

Multinational corporations should also carefully examine their supply chains to understand the composition of their emissions. There may also be indirect impacts of CBAM as businesses trading in affected commodities either reduce emissions, absorb the carbon price, or pass it down the supply chain, ultimately impacting the business.

Although New Zealand does not have significant activity within the carbon-intensive industries, the implementation of the EU's CBAM still carries certain implications for New Zealand businesses. These include:

• Immediate impact on New Zealand exporters: Exporters in the carbon-intensive industries will need to meet reporting obligations under the EU's CBAM implementation when exporting to the EU.
• Price increase for New Zealand importers: Importers of carbon-intensive goods may face price hikes throughout their supply chains as suppliers try to pass on the costs associated with the EU's CBAM.
• Monitoring EU's CBAM and Australian mechanism: New Zealand businesses should closely monitor the progress of the EU's CBAM and the Australian mechanism. These developments can provide insights into future policies in New Zealand, allowing businesses to proactively prepare for potential CBAM-related initiatives in the country.

If you would like to receive more information about the impact of CBAM and how Deloitte can assist you, please reach out to one of our experts. Deloitte has also created a page dedicated to CBAM, which can be found here.