The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a cornerstone of the EU’s strategy to reduce greenhouse gas emissions and prevent carbon leakage. Carbon leakage occurs when businesses relocate production to countries with less stringent climate policies, undermining global decarbonization efforts.
CBAM ensures that carbon-intensive goods imported into the EU face a carbon cost like that borne by EU producers under the Emissions Trading System (ETS). This article explains CBAM requirements for importers in the EU, exporters to the EU, covered products, cost implications, and its potential evolution.
Overview of CBAM and Its Purpose
CBAM imposes a carbon price on imported goods to level the playing field between EU producers (who pay for emissions under the EU ETS) and non-EU producers. This prevents businesses from gaining a competitive advantage by producing in jurisdictions with weaker climate policies.
How CBAM Works:
- Importers declare the embedded greenhouse gas (GHG) emissions in certain imported goods.
- CBAM certificates must be purchased to account for these emissions, aligning the cost with the EU ETS carbon price.
- If a carbon price has already been paid in the exporting country, importers can deduct that cost from their CBAM obligations.
Who Needs to Complete What Paperwork?
Importers into the EU:
- Registration: Importers must register in the CBAM Transitional Registry.
- Reporting: During the transitional phase (1 October 2023 – 31 December 2025), importers submit quarterly reports.
- Declared Information: The report includes:
- Total embedded emissions (Scope 1 and Scope 2) of imported goods.
- Production methods used.
- Carbon price paid, if any, in the country of origin.
- Post-2026: Importers must purchase and surrender CBAM certificates corresponding to the reported emissions.
Exporters to the EU:
- Exporters must provide importers with accurate data on embedded emissions (Scope 1 and Scope 2). If no verified data is available, default values provided by the EU must be used.
- Accurate reporting benefits exporters, as high default values may overestimate emissions, increasing costs
Products Covered Under CBAM
It currently applies to a selection of carbon-intensive goods, specifically:
- Iron and Steel: Includes raw materials (e.g., pig iron, steel bars, sheets, and tubes).
- Cement
- Aluminium
- Fertilizers
- Hydrogen
- Electricity
Note: CBAM applies to raw and semi-finished goods only. Finished products containing these materials (e.g., tractors, cars) are currently exempt but may be included in the future.
Tax Implications and Cost Calculations
The cost of CBAM certificates mirrors the EU ETS carbon price. As of mid-2024, the ETS price is approximately €85 per tonne of CO₂e.
Example 1: Cost of Importing 100 Tonnes of Steel
Assume the embedded emissions for steel are 2 tonnes of CO₂e per tonne of steel:
- Total emissions = 100 tonnes × 2 tCO₂e/tonne = 200 tCO₂e
- Cost of CBAM certificates = 200 tCO₂e × €85 = €17,000
Example 2: Cost of Importing 100 Tonnes of Concrete
Assume the embedded emissions for concrete are 0.5 tonnes of CO₂e per tonne of concrete:
- Total emissions = 100 tonnes × 0.5 tCO₂e/tonne = 50 tCO₂e
- Cost of CBAM certificates = 50 tCO₂e × €85 = €4,250
Importers in the UK or other non-EU countries must include these additional costs when planning exports to the EU.
CBAM and Electricity Imports
Electricity imports into the EU are also subject to CBAM. The mechanism applies to electricity generated in non-EU countries and imported into the EU via cross-border interconnections.
UK-EU Electricity Links
- The UK exports electricity to the EU through undersea interconnectors (e.g., the IFA, BritNed, and Nemo links).
- CBAM will apply to electricity imports unless the exporting country has equivalent carbon pricing mechanisms.
- The UK’s current Carbon Price Support (CPS) and Emissions Trading Scheme (UK ETS) may partially offset CBAM obligations.
Cost Calculation for Electricity:
- The carbon intensity of electricity generation determines the embedded emissions (measured in kgCO₂e per MWh).
- Importers must purchase CBAM certificates based on the total emissions associated with imported electricity.
For example:
- Assume electricity imported into the EU has a carbon intensity of 400 kgCO₂e/MWh.
- Importing 1,000 MWh would result in 400 tCO₂e.
- Cost of CBAM certificates = 400 tCO₂e × €85 = €34,000.
Future of CBAM
It is currently in its transitional phase, which focuses on reporting emissions without requiring the purchase of certificates. However, from 1 January 2026, the full mechanism will apply, requiring importers to purchase CBAM certificates.
Potential Future Developments:
- Expansion of Product Scope: CBAM may include finished goods and additional sectors (e.g., chemicals, plastics) post-2025.
- Adjustments for Carbon Pricing: Countries with carbon pricing schemes (e.g., the UK, Canada) may receive partial exemptions.
- Global Adoption: CBAM could set a precedent for similar mechanisms globally, encouraging non-EU countries to implement stronger climate policies.
Conclusion
The EU’s CBAM is a significant step toward decarbonizing global supply chains and preventing carbon leakage. Importers and exporters must understand the reporting requirements, covered products, and cost implications to comply with CBAM regulations effectively. While CBAM currently applies to raw materials and semi-finished goods, it may expand to include finished products in the future, further impacting global trade.
For businesses exporting to the EU, providing accurate emissions data is essential to minimize costs. As CBAM evolves, aligning production practices with low-carbon technologies will be key to maintaining competitiveness in the EU market.
Reference
For official CBAM updates and access to the CBAM Transitional Registry, visit the European Commission’s official page: Carbon Border Adjustment Mechanism – European Commission.
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