The European Union (EU) has taken a bold step to help member states address climate change with a new carbon regulation called the Carbon Border Adjustment Mechanism (CBAM). While the existing EU Emissions Trading System (ETS) covers EU countries, CBAM applies to goods produced outside the EU (except Iceland, Norway, Liechtenstein, and Switzerland).
The goal of CBAM is to address the problem of carbon leakage, which occurs when companies move the production of goods to countries with less stringent emissions policies, primarily to save costs associated with carbon pricing. US companies that sell their products to customers in Europe need to understand the reporting requirements of the CBAM regulation. Already, US companies have been receiving compliance/reporting requests from their EU-based customers, and they can only expect the volume of those requests to continue increasing.
What is CBAM?
CBAM is a policy instrument designed to equitably price carbon emissions associated with the production of carbon-intensive goods imported into the EU. CBAM imposes a tariff on the carbon emissions of imported goods in order to equalize the playing field for EU-based companies that adhere to more stringent emissions standards. As an EU regulation, CBAM is effective in all EU member states. The goal is to promote cleaner industrial practices in countries outside the EU. CBAM ensures that imported goods are subject to a carbon price equivalent to that applied to domestic EU production. This assurance is achieved by verifying that the carbon costs embedded in the production of certain imported goods have been accounted for.
Initially, CBAM will apply to imports of goods and certain materials whose production is particularly carbon-intensive, and at most significant risk of carbon leakage. This includes:
- Cement
- Iron and steel
- Aluminum
- Some chemical industries (fertilizers and hydrogen)
- Electricity
The CBAM regulation contains a list of goods which can be compared to your organization’s products’ CN codes. Combined Nomenclature (CN) is the coding system used by the EU to classify goods for import, export, and intra-EU trade.
The EU intends to evaluate, and possibly broaden the scope of CBAM by 2030. The goal is to have CBAM cover more than 50% of emissions from sectors within the ETS when CBAM is fully implemented in 2034. CBAM will be implemented in phases with a transitional period running from 2023 to 2025, and the full implementation set to begin in 2026. This timeline will allow for a gradual adaptation period for businesses and authorities both within and outside the EU.
What is the Difference in CBAM Reporting for Importers Versus Operators?
CBAM directly impacts entities importing goods into the EU, known as importers. These importers will need to obtain relevant data from the manufacturers of CBAM-regulated goods, referred to as operators. While operators do not have direct responsibilities under CBAM, they will experience indirect effects due to the information requirements placed on importers. US producers typically fall under the operator requirements. Only Importers have direct reporting obligations to the EU. It is important to note that importers will not face any financial obligations until 2026 when CBAM becomes “definitive.”
Importers: During the transition phase, there are quarterly reporting requirements. The report must include:
- Energy use
- Embedded emissions
- Country of origin
- Carbon price to be paid in the country of origin
After the transition phase, importers will be required to purchase CBAM certificates. Reporting obligations will be reduced from quarterly to annual reports due by May 31 of each year. The first annual report is due on May 31, 2027 for the year 2026.
Operators (manufacturers): US operators must provide embedded emissions data to importers for CBAM-covered goods imported to the EU. Operators need to account for both direct emissions and indirect emissions. For US companies whose goods are integrated by another operator to create other goods subject to CBAM regulations, they must inform this operator about the embedded emissions associated with those products. Unlike previous EU and national legislation, there are no exemptions for small enterprises under CBAM. In some cases, importers and manufacturers will face such reporting obligations for the very first time, so they should prepare as soon as possible.
CBAM Implementation
CBAM will be implemented in phases. The transitional phase, which runs through the end of 2025, will serve as a pilot period. This will provide the opportunity for all stakeholders to implement key takeaways before the definitive period starts in 2026. Following the transitional phase, additional products will be determined to be in scope with a goal of all EU ETS goods to be included by 2030.
Beginning in 2026, companies importing CBAM-covered products into the EU will need to buy and submit CBAM certificates annually. These certificates will correspond to the embedded emissions of the imported goods. The European Commission (EC) will set the price for these certificates, linking it to the EU Emissions Trading System (ETS) auction prices. Before 2026, during the transitional period, importers must file quarterly reports on their CBAM goods, but they won’t have to purchase certificates yet.
CBAM Noncompliance
Failure to comply with CBAM reporting requirements or inaccuracies in CBAM reports can result in penalties set by each EU member state, ranging from €10 to €50 per ton of unreported or incorrectly reported embedded emissions.
Authorized CBAM declarants, which fail to surrender the necessary number of CBAM certificates by May 31 of each year starting in 2027, will be held liable for the payment of fines equal to those under the EU ETS, meaning €100 for each ton of CO2.
Conclusion and Recommendations
It is important for US manufacturers with EU exports to recognize the serious repercussions of failing to meet CBAM reporting requirements. Every EU nation will enforce harsh penalties, which likely will grow more severe the longer noncompliance persists. The impact may reach beyond direct EU importers; US producers without direct EU sales could also feel the effects. EU importers are likely to pass on noncompliance costs to their foreign suppliers through contracts. This means US suppliers might face financial penalties or lose contracts if they do not support CBAM compliance. The impact could ripple through the entire supply chain of US manufacturers connected to the EU market, affecting more than just direct exporters.
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