Background on Climate Commitments

As of June 2023, the United Nations reports that 195 parties have signed the Paris Agreement, committing to limiting their greenhouse gas (GHG) emissions. However, the agreement allows each country to determine its own reduction targets within specific guidelines, leading to varying levels of commitment worldwide.

Europe has positioned itself as a leader in climate action and aims to be the first continent to achieve climate neutrality by 2050. The European Green Deal, launched in 2019 and adopted in 2020, outlines a comprehensive strategy of policy measures—both tax-related and regulatory—to reach this goal. In September 2020, the EU announced its intention to cut emissions by 55% by 2030 compared to 1990 levels. To achieve this, the European Commission introduced the Fit for 55 legislative package in July 2021, aligning climate, energy, transport, land use, and taxation policies with the 2030 emissions target.

CBAM as Part of the European Green Deal and Fit for 55

A key component of the Fit for 55 package is the revision of the EU Emissions Trading System (ETS), which expands its coverage to new sectors, reduces the number of free emission allowances, and lowers the overall emissions cap. These changes aim to accelerate industrial decarbonization but also raise carbon prices. A potential consequence of higher emissions costs is carbon leakage, where companies might shift production to countries with weaker emissions regulations or consumers might opt for cheaper, higher-emission imports.

While the EU is actively reducing emissions, many other regions have yet to follow suit. To address this imbalance and mitigate carbon leakage, the EU has introduced the CBAM. Initially proposed in 2019 as part of the Green Deal, CBAM is a crucial measure within Fit for 55.

CBAM Regulation and Implementation

The CBAM regulation took effect on 17 May 2023 and will be implemented in stages, beginning 1 October 2023. It is designed to level the playing field by applying a carbon cost to imported goods equivalent to what EU producers pay under the ETS. This charge is adjusted based on any mandatory carbon pricing in the exporting country. Over time, CBAM will phase out the free ETS allowances that EU industries currently receive, ensuring fair competition while encouraging global decarbonization efforts.

Affected Products

Initially, CBAM will apply to imports of high-carbon products such as cement, electricity, fertilizers, aluminum, iron, steel, and hydrogen, along with some related upstream and downstream goods. Imports from countries already participating in or linked to the EU ETS (such as Norway, Iceland, Liechtenstein, Switzerland, and select territories) are exempt. By 2030, the EU plans to extend CBAM to all sectors covered under the ETS.

CBAM Implementation Timeline

1 October 2023 – 31 December 2025 (Transitional Phase):
During this period, businesses must comply with reporting requirements but will not face financial obligations. Importers must document the direct and indirect emissions linked to their imported goods. Since many companies currently lack IT systems for accurately tracking carbon dioxide equivalent (CO₂e) emissions, meeting these requirements may pose a challenge.

Importers will also be required to submit quarterly CBAM reports detailing:

• The quantity of imported CBAM goods
• The embedded emissions associated with those goods
• Any carbon taxes paid in the production country (reporting on indirect emissions initially applies only to cement, electricity, and fertilizers)

1 January 2026 Onward – Full CBAM Implementation:

• Only registered declarants will be permitted to import CBAM-covered goods. Customs authorities in EU member states will monitor compliance and block imports from unregistered entities. Importers must apply for authorization starting 1 January 2025.
• Certificate Trading Begins (1 January 2026): Importers will be required to purchase CBAM certificates equivalent to the embedded emissions in their goods. Annual declarations will compare acquired certificates with actual emissions, with penalties imposed for shortfalls.

Key Requirements for Companies

From 2026 onward, companies importing CBAM-covered goods must:

1. Measure and report the direct and indirect CO₂e emissions of imported products based on actual or default values (default values apply only to electricity).
2. Verify emissions data through a certified testing body if actual values are used.
3. Purchase CBAM certificates to offset the carbon content of imported goods.
4. Submit an annual CBAM declaration (due 31 May of the following year) reconciling imported emissions with purchased certificates.

Preparing for CBAM Compliance

Businesses must begin adapting now to ensure compliance with CBAM regulations. The first critical step is meeting reporting obligations starting 1 October 2023. EU importers should review their supply chains to assess emissions data and prepare for future costs associated with CBAM implementation.

As CBAM expands to more sectors, companies will face growing regulatory requirements. Organizations should evaluate their emissions footprint, engage with suppliers on sustainability strategies, and integrate carbon considerations into procurement and pricing models. Remaining proactive and well-informed will be essential for navigating the transition smoothly and minimizing business disruptions.