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Are you ready for CBAM?

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy instrument designed to support the European Union climate ambitions of achieving a net reduction of greenhouse gas (GHG) emissions of at least 55% by 2030 and of reaching climate neutrality by 2050 at the latest.

CBAM is a groundbreaking regulatory instrument implemented by the European Union with global traction to address carbon leakage. It aims to ensure that imported goods are subject to a carbon price equivalent to the carbon price of domestic production in the EU. Carbon leakage occurs when industries move their production to regions with lax environmental regulations to avoid the cost of carbon pricing, thereby undermining the effectiveness of emission reduction efforts in the EU. CBAM aims to combat this by imposing a carbon price on goods imported into the European Union based on the emissions associated with their production, ensuring a level playing field for domestic and foreign producers.

Where to find further information about CBAM?

1. CBAM in 60 seconds

https://www.youtube.com/watch?v=Cc4jfgFqQpM

2. Nano learning 10 minutes – Introduction to CBAM

https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_de#resources

3. e-learning course 45 minutes – CBAM specifics for each sectors

https://customs-taxation.learning.europa.eu/course/view.php?id=770§ion=1

4. CBAM EU Regulation

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2023.130.01.0052.01.ENG&toc=OJ%3AL%3A2023%3A130%3ATOC

5. Guidance document on CBAM implementation for importers of goods into the EU

https://taxation-customs.ec.europa.eu/system/files/2023-08/CBAM%20Guidance_EU%20importers_0.pdf

6. Provisional list of National Competent Authorities for CBAM

https://taxation-customs.ec.europa.eu/system/files/2023-10/23%2010%2006%20CBAM%20-%20NCAs%20provisional%20list.pdf

Do your products fall in scope of CBAM regulation?

In the first phase, CBAM targets the products of six sectors (cement, hydrogen, fertilizers, iron and steel, as well as the aluminium) with higher risk of carbon leakage including some precursors and downstream products. In a second stage, CBAM will extended to other sectors:

  • CEMENT
  • FERTILISER
  • IRON & STEEL
  • ELECTRICITY
  • ALUMINIUM
  • HYDROGEN
Check if goods you import are listed in Annex I to the CBAM Regulation.

The Combined Nomenclature (CN) classification system defines the essential characteristics of goods and is used to identify those sector goods in scope for the CBAM.

The CN ‘product specification’ classification system comprises two parts, firstly a numerical 4, 6 or 8-digit numbering system, reflecting different levels of product disaggregation, and secondly a short text description of each product category giving its essential characteristics. The first 6 digits are identical to the Harmonised System (HS) classification used in international trade and the remaining 2 digits are EU-specific additions.

In doubt, get in touch with the National CBAM Competent Authority (NCA) in the country where you are established.

For further information about how MyTower GTM – Classification solution can help you automate your products classification – please visit https://www.mytower.co/.

What are the key principles of the CBAM framework?

The CBAM framework operates on four key principles:

1. Carbon Pricing

CBAM introduces a carbon price on imported goods based on their embedded carbon emissions. This price is designed to align with the carbon pricing mechanisms in place in the importing country. It effectively makes importers accountable for the emissions associated with the production of the goods they import into Europe.

2. Carbon Emission Calculation

To calculate the carbon content of imported goods, CBAM relies on a robust methodology that considers the entire life cycle of the product. This includes emissions from manufacturing, transportation, and other relevant stages. The goal is to provide a fair assessment of the carbon footprint associated with each product.

3. Compliance and Reporting

Importers are required to report the carbon content of the goods they bring into the country. This reporting is subject to verification and auditing to ensure accuracy and prevent abuse of the system.

4. Border Adjustment

The CBAM mechanism includes a border adjustment, where importers must pay a carbon fee if the carbon content of their goods exceeds the established threshold. This fee aims to level the playing field for domestic producers who are subject to carbon pricing within their home country.

See the useful EU Commission guidance (pdf) document on CBAM implementation for importers of goods into the EU via https://taxation-customs.ec.europa.eu/system/files/2023-08/CBAM%20Guidance_EU%20importers_0.pdf

CBAM Impact on global supply chains

CBAM is not limited to a single country or region. It has the ambition to become a global standard for addressing carbon leakage and promoting fair competition among industries worldwide. Several major economies, including the European Union, have already made significant strides in implementing CBAM legislation.

What are the Benefits of CBAM?

  • Emission Reduction: By incentivizing carbon reduction across the entire supply chain, CBAM contributes to global emissions reduction efforts.
  • Fair Competition: Domestic industries are no longer at a disadvantage compared to foreign competitors who do not face the same carbon pricing.
  • Revenue Generation: Revenue generated from CBAM can be reinvested in climate-related projects and initiatives.
  • Global Collaboration: CBAM encourages international cooperation on climate action and aligns trade policies with environmental goals.
What are CBAM challenges?

CBAM’s Disruptive Effect on Global Industrial Value Chains

CBAM adoption will have significant implications for industrial supply chains. It will not only affect producers of covered goods but also industries downstream and upstream the value chain, such as automotive, construction, and manufacturing sectors. Customers will now be looking for scarce green or recycled steel and green cement, increasing competition for access to low-carbon materials and products, which will drive up their demand. As the cost of carbon-intensive products rises, companies may have to adjust their business models, supply chains, and operations to reduce their carbon footprint.

While CBAM holds promise, it also presents challenges. Implementing a global system requires coordination, transparency, and robust verification mechanisms to ensure its effectiveness and prevent trade conflicts. Additionally, there are concerns about the potential impact on developing economies. CBAM must be implemented in a way that balances the need for emissions reduction with the need for economic development in these regions.

Several industries and international organizations like the World Trade Organization (WTO) and the United Nations Framework Convention on Climate Change (UNFCCC) have issued position papers or statements regarding CBAM.

See their latest views and concerns directly on to their website for most up to date information like those ones:

Energy Sector:

https://www.eurofer.eu/publications/position-papers/joint-statement-by-energy-intensive-sectors-on-cbam/

Automotive Industry:

https://www.acea.auto/publication/position-paper-carbon-border-adjustment-mechanism/

Chemical industry :

https://cefic.org/app/uploads/2022/01/Cefic-position-on-CBAM-The-Carbon-Border-Adjustment-Mechanism-CBAM-proposal-needs-upgrading-for-chemicals.pdf

Agricultural and Food Industries:

https://www.cema-agri.org/images/publications/position-papers/CEMA_Position_on_CBAM_2021.pdf

When does CBAM go into effect?

The CBAM will be implemented in two distinct phases:

CBAM Transition Phase

The CBAM transition phase hast kicked off on October 1, 2023, and will conclude on December 31, 2025.

Your initial report must be submitted by January 31, 2024.

During this phase, reporting is the primary requirement, and there is no obligation to purchase CBAM certificates.

What do you need to report?

  • The quantity of imported products.
  • Both direct and embedded carbon emissions.
  • Carbon costs incurred in the country of origin.
Which actions to take in preparation with your reporting obligations (as from October 2023):

  • Appoint a cross functional project team internally to assess CBAM impact on your organization i.e Legal, Products Regulatory, EH&S, Customs, Supply Chain, Procurement etc
  • Use CBAM Checklist for EU importers as help tool to kick off your project
https://taxation-customs.ec.europa.eu/system/files/2023-10/CBAM%20checklist%2002-10.pdf

  • Determine whether any of your goods will be impacted by CBAM regulation – all linked to your customs commodity codes, so it is essential to classify your goods correctly to avoid potential issues.
  • Inform your suppliers about the changes and the reporting requirements
  • Stay vigilant for any product-specific regulations governing the calculation of embedded carbon.
  • Verify that your supplier information is accurate before the CBAM transition phase begins in October to ensure you have complete and reliable data from the outset.
  • Ensure you possess a valid EORI number.
CBAM Operational Stage

The CBAM operational phase will commence on January 1, 2026, at which point the full Carbon Border Adjustment Mechanism will be in effect. You will be required to make an annual declaration to the commission, either directly or through a CBAM-authorized declarant.

Your first annual declaration is due by May 31, 2027.

Conclusion

As the world grapples with the urgent need to mitigate climate change, innovative approaches and instruments like CBAM are becoming increasingly essential. CBAM represents a transformative shift in how we address carbon emissions on a global scale, with the potential to revolutionize the way industries operate and compete.

While challenges remain, the promise of CBAM lies in its ability to align economic incentives with environmental goals, fostering a more sustainable and equitable future for all. As countries and industries continue to adopt and refine CBAM policies, it's clear that this mechanism will play a pivotal role in the transition to a greener and more responsible global economy.

Written by Delphine Neveux

Vice President Global Trade Management MyTower