Since the European Unionâs Carbon Border Adjustment Mechanism (CBAM) framework was launched and began its transitional period in October 2023, companies around the world have received an increasing number of requests from their EU customers, which has stirred up a good bit of uncertainty and sometimes downright bewilderment about how best to comply with the reporting requirements. Companies most often receive spreadsheet templates that can be difficult to interpret for newcomers, or sometimes notifications and requests through the emerging set of CBAM software platforms.
Companies needing to comply with CBAM face challenges that include gathering data on embedded emissions from third-country suppliers. EU importers lacking actual data on emissions embedded in CBAM goods to support their declaration must use default values for only 20% of the total embedded emissions in imported CBAM goods. Unfortunately, using default values, along with the challenge of gathering data on embedded emissions following a complex EU calculation methodology, has made things difficult for a number of companies. In some cases, it is impossible for some companies to fulfill their reporting obligations relying on actual emissions values.
The European Commission (EC) has recognized this will be challenging, and has clarified that there needs to be some flexibility in the enforcement of sanctions by national competent authorities (NCAs). A reporting declarant will have the opportunity to demonstrate that all reasonable efforts have been made to gather data on embedded emissions from third-country operators.
The EC indicates that when assessing justifications, NCAs may consider the following factors:
- The means and resources dedicated by declarants to obtain the required data
- The frequency and duration of follow-up attempts
- The declarantsâ operational capacity and the suppliersâ ability to calculate actual emissions
The ultimate assessment will be conducted by NCAs, who will decide on any leniency for situations of noncompliance. In the Q&A document updated on October 24, the Commission clarified that reporting declarants can specify directly in the CBAM registry the lack of actual data via a dedicated new option that exists for both direct and indirect embedded emissions. If this option is chosen, reporting declarants are expected to provide an explanation of why actual emissions data is missing and upload supporting documents demonstrating unsuccessful efforts taken to obtain data from suppliers and/or producers.
The goal of CBAM is to address the risk of carbon leakage by requiring companies that import relevant products to surrender certificates at a cost. The number of certificates to be surrendered depends on factors such as the amount of CO2e emissions released during the manufacturing process of the relevant products imported into the EU. The relevant products covered by CBAM include a range of basic materials, semi-finished products, and a limited number of finished products in the following product categories: iron and steel, cement, fertilizer, aluminum, electricity, and hydrogen. Currently, CBAM covers only a limited number of product categories, and the EC has announced that the scope of CBAM will be extended to all sectors covered by the EU Emissions Trading System (EU ETS) by 2030, and that the scope of CBAM is expected to be further extended to organic polymers and plastics in the near future.
Installation Operators
A new portal section of the CBAM Registry will allow installation operators outside the EU to upload and share their installations and emissions data with reporting declarants in a streamlined manner, instead of submitting it to each declarant separately. The portal will allow operators to ensure the confidential treatment of business-sensitive data. Reporting declarants will then be able to automatically populate their CBAM reports with this emissions data in order to comply with their reporting obligation. Registration for installation operators will open on January 1, 2025.
Installation operators are entities that have direct access to information on the emissions of their installations. They are responsible for monitoring and reporting the embedded emissions of goods they produce and export to the EU. They are responsible for tracking and measuring the direct and indirect greenhouse gas (GHG) emissions associated with the production of CBAM-covered goods. In addition, they must calculate the total emissions embedded in their products, taking into account the entire value chain, from raw materials extraction to final product. Finally, installation operators are required to submit detailed reports on their emissions data to the EU authorities. This data will be used to determine the CBAM adjustment amount that importers will have to pay. They play a crucial role in facilitating a smooth transition to a low-carbon economy.
Reporting Requirements
Reporting declarants will be required to submit a quarterly CBAM report for CBAM products imported during the respective quarter. The CBAM report must be submitted before the end of the following month. The CBAM report should contain details on the following information:
- The total quantity of products in scope of CBAM imported during the reporting quarter
- Information on embedded direct and indirect emissions of these products
- Where applicable, the carbon price due in the country of origin
If the CBAM report is not submitted or is submitted incorrectly or incompletely and the reporting declarant hasn’t taken the necessary steps to correct or comply with the reporting obligation, EU Member States may impose a penalty on the reporting declarant. The penalty may range from broadly â¬10 to â¬50 per ton of unreported emissions. This will depend on factors such as the extent of the unreported information and the degree of negligence of the reporting declarant.
Conclusion
CBAM poses a significant challenge for companies that import goods into the EU, particularly those sourcing from outside the EU. While the transitional period offers some flexibility, the complexities of data gathering, especially regarding embedded emissions, remain a significant hurdle. The European Commission has recognized these challenges and provided some leniency in enforcement, allowing for reasonable efforts to be demonstrated. However, as the scope of CBAM expands to cover more sectors, companies will need to adapt their supply chain strategies and reporting processes. Ultimately, successful compliance with CBAM will require a collaborative effort between importers, exporters, and policymakers. If your company needs assistance in navigating the complexities of CBAM compliance and reporting, please contact Canopy Edge for a consultation on how our team of experts can help.
