Carbon Border Adjustment Mechanism: What does the CBAM mean for companies?
With the introduction of the Carbon Border Adjustment Mechanism (CBAM), significant changes lie ahead for a lot of industrial and trading companies in the European Union: Since 1 October 2023, companies that import emissions-intensive goods such as steel, aluminium and cement from non-EU countries are required to document the direct CO2 emissions during production, as well as the indirect emission for some types of goods. From 01/01/2026, companies will have to purchase corresponding CBAM emissions certificates. The CO2 compensatory levy is intended to bring the emissions price for imports to the same level as products produced in the EU, negating the competitive disadvantage for producers that are based in the EU. The CO2 border adjustment mechanism CBAM supplements the EU Emissions Trading System (EU ETS), which was introduced in 2005 as the EU's central climate protection instrument.
What goals is the EU pursuing with the CO2 border adjustment mechanism?
- Climate neutrality by 2050: As the world's leading confederation of states, the EU is striving to become climate-neutral by 2050. To achieve this goal, approximately three-quarters of all CO2 emissions in Europe will be included in emissions trading in future.
- Reduction of CO2 emissions: As part of the "Fit for 55 package", as a first step CO2 emissions should be reduced by 55% by 2030, compared to 1990 levels.
- Creation of fair competitive conditions: The addition to achieving the climate protection objectives, the CO2 compensatory levy is also intended to result in imports from non-EU countries having emissions prices at the same level as goods that are produced in the EU.
- Prevention of carbon leakage: The harmonisation of emissions prices by means of the CBAM is intended to prevent production facilities being relocated outside of the EU to countries that have less stringent climate protection legislation.
- Conversion to more climate-friendly manufacturing processes: The increasing costs and the extensive reporting obligations as part of emissions trading act as incentives for companies to adopt manufacturing processes that produce fewer emissions and pollutants.
- Incentive to reduce emissions for manufacturers outside the EU: The CBAM compensates for the lower emissions prices for goods that are produced outside the EU. This may be an incentive for non-EU producers to reduce the emissions in their manufacturing process in order to remain competitive.
Which product groups are affected by the CBAM?
The CBAM applies to certain products that have a particularly CO2-intensive manufacturing process. There is a high risk that these corresponding products will be imported from non-EU countries to reduce the emissions price.
Overview of current CBAM products
In future, the border adjustment mechanism may be expanded to cover additional energy-intensive raw materials. Discussions are currently ongoing as to whether polymers, various chemicals and glass products will become subject to reporting obligations. All companies that import CBAM products from non-EU countries are subject to the CBAM reporting obligations and must purchase corresponding CBAM emissions certificates.
CBAM exemptions: Which products are exempt from the CO2 border adjustment?
In principle, the CBAM Regulation applies to all imports of CBAM products from non-EU countries. However, there are a number of exemptions. In the following cases, importers are not subject to reporting obligations and do not have to purchase CBAM certificates:
- Goods from EFTA states outside the EU: Third countries that participate in the ETS or have a comparable emissions trading system are exempt from the border compensatory levy. This currently applies to Iceland, Liechtenstein, Norway and Switzerland*. The areas of Büsingen, Heligoland, Livigno, Ceuta and Melilla are also included.
- Low goods value: If the total value of the goods is less than 150 euro, the importer is exempt from the CBAM Regulation. The same applies to goods that enter the EU in an individual's personal baggage.
- Returned goods: CBAM products that are exported from the EU to a third country and that are then reimported due to unforeseen circumstances are not subject to the CBAM Regulation.
- Military purposes: If goods are imported by the military authorities of an EU Member State under the auspices of the EU's Common Security and Defence Policy or those of NATO, the CBAM obligations do not apply.
However, there is no CBAM exemption for companies with low import volumes — these companies are also required to report and purchase CBAM certificates in the same way as all other companies.
*The scope of CBAM is dependent on the type of goods and the non-preferential origin of goods.
Purchasing and the price of CBAM certificates
The CO2 border adjustment system is currently in the first phase of its implementation. At the end of the transitional phase, from January 2026, trading and industrial companies will have to purchase emissions certificates for the CBAM products that they import. The price of the CBAM certificates is based on the average auction prices in EU emissions trading — i.e. companies pay the same levy that would be due had the products been manufactured within the EU. If the company can prove that a CO2 levy has already been paid for the imported product in a third country, these costs can be deducted from the CBAM certificate. This should motivate non-EU countries to also introduce a CO2 levy on its products and thereby promote climate-friendly production of raw materials.
CBAM reporting: Who is responsible and what has to be reported?
The CBAM reporting obligation lies with the relevant importing company. The company must state the product volumes in tonnes as well as requesting the direct and indirect CO2 emissions during manufacturing in the third country and accurately documenting this information. If it is not possible to obtain this data from the manufacturer, the default values for the relevant country of origin as defined by the European Commission are used. Whereas there is a quarterly obligation to submit reports to the CBAM Transitional Registry during the transitional phase until the end of 2025, CBAM reports need to be submitted annually from 2026.
The EU Commission recently made it clear that the provisions of Art. 4 CBAM Regulation 2023/1773 for the calculation of actual emissions continue to apply. CBAM reporters are obliged to determine and report the actual emissions for each import of goods from 1 August 2024 in accordance with the calculation methods set out in Art. 4 I or II CBAM Regulation 2023/1773.
If CBAM declarants are unable to report data on actual emissions, they must demonstrate that they have made all reasonable efforts to obtain this data from their suppliers or manufacturers of CBAM goods. They should use the "Comments" field in the CBAM Transition Register for documentation and also attach evidence to document unsuccessful efforts and steps taken to obtain data from suppliers and/or manufacturers.
National implementing authorities have discretionary powers when reviewing the reports. Notwithstanding the discretionary powers, the Commission may request additional information from CBAM notifiers to supplement or correct an incomplete or incorrect CBAM report in accordance with Art. 35(4) CBAM Regulation.
CBAM timeline: Gradual introduction of the CO2 border adjustment mechanism
The Carbon Border Adjustment Mechanism has begun to be gradually implemented since October 2023; initially with a transitional phase until December 2025. A simplified reporting obligation applies during this time and CBAM certificates do not have to be purchased. This allows companies within and outside of the EU that are involved in imports to become familiar with the system and the reporting obligations. It also allows the European Commission to collate initial experiences of the CBAM, which can provide input until the scheme is fully implemented from 2026.
During the transitional phase CBAM certificates do not have to be purchased for imports and companies do not yet have to register as an "authorised CBAM declarant". There is a simplified (quarterly) reporting obligation for:
- Total amount per type of good
- Total amount of embedded emissions
- Direct CO2 emissions (emissions from the manufacturing process) in tonnes per product*
- Indirect CO2 emissions from the generation of electricity required for the manufacturing process*
- Any CO2 levy paid in the country of origin
* Direct and indirect emissions can still be reported with default values for the past 2nd quarter 24 until 31 July at the latest. This date also applies to corrections to declarations already submitted for Q4 23 and Q1 24.
The implementation phase for the CBAM begins in parallel to the transitional phase on 31/01/2024 with the submission of the first CBAM reports. The default values for the direct and indirect CO2 emissions as defined by the EU Commission may still be stated during this period. From 31/10/2024, importers are required to obtain the actual emissions data from the manufacturer and to include this data in the report.
Additional steps in the implementation of the CBAM:
01/01/2025
- Creation and commissioning of the CBAM register
- Companies must register as authorised CBAM declarants
01/01/2026
- Beginning of the definitive regime
- Imports are only permitted with CBAM certificates
- Submission of an annual CBAM report (by no later than 31/05/2027)
Further information on the CBAM in the EU
The CBAM is currently in the transitional phase — there may therefore be amendments to the legislation and in the timeframe for the implementation of the border compensatory levy. Current information about the CBAM, possible CBAM exemptions and answers to frequently asked questions can be found at: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en?prefLang=en.