CBAM: key learnings and upcoming challenges

With the EU Carbon Border Adjustment Mechanism partly coming into force on 1 October 2023, EU importers of products within the scope of CBAM, such as iron and steel, aluminium, cement, fertiliser, electricity, and hydrogen, are now required to report the embedded carbon emissions for their imports. For imports in Q3 2023, Q1 2024, and Q2 2024, the embedded emissions could be reported using default standard values published by the EU Commission.

However, on 31 October 2024, the CBAM reached another significant milestone, as EU importers are now required to report the embedded emissions of their CBAM imports using actual data collected from their suppliers. For many companies, CBAM therefore continues to present a significant reporting challenge.

With this first quarter of actual data reporting behind us, we have summarised some of the key learnings in the first year with CBAM together with some of the upcoming challenges that importers will face going forward.

It is our experience that CBAM is still somehow a “hot potato” being a customs and tax issue but at the same time a data project and a supply chain/procurement challenge. Therefore, various stakeholders are involved. Typically, the customs and tax/VAT teams own the import data management, with sustainability and/or purchasing teams owning the engagement with their suppliers. Hence, a dedicated and multidisciplined team must be pointed out to take lead. Overall, it is our experience that the first year of CBAM reporting has primarily been driven by the tax departments given their experience with reporting and compliance in general, hence having the right processes and expertise for such new regulation.

Also, based on our experience so far, it must be concluded that supply chain collaboration is key. The EU CBAM requires businesses to work closely with their suppliers to gather accurate emissions data. Many EU importers found their suppliers were unprepared to provide emissions data in the detail required, hence awareness and understanding of CBAM monitoring and reporting processes vary significantly among both EU importers and non-EU manufacturers. We have found that collaborating with suppliers on carbon accounting is not only beneficial but essential. Engaging suppliers in emissions-reduction initiatives and supporting them with resources for emissions tracking can help build a stronger, more resilient supply chain that aligns with CBAM’s objectives. However, there is no “quick fix”, and companies that invested in supplier engagement before the reporting period will most likely experience fewer difficulties, highlighting the value of proactive partnerships in emissions reporting.

Finally, it should be emphasised that data and digital solutions are essential for managing CBAM. The complexity of CBAM reporting has showcased the need for accurate data and efficient digital solutions. EU importers with global supply chains cannot depend on manual methods to collect and calculate embedded emissions data. This approach proves labour-intensive and prone to errors, especially for companies with supply chains involving numerous emissions sources. In this connection, we see that CBAM tools are offered by various professional service providers within the world of tax and ESG in general with the purpose of enabling companies to automate data collection, communicate with suppliers, calculate emissions accurately, and streamline reporting.

Obviously, the most present challenge for EU importers of CBAM products is the new requirement to use primary/actual data on embedded emissions from the suppliers instead of using the default standard values published by the EU Commission. Hence, the Q3 2024 CBAM reporting has highlighted the value of transparent communication and building of trust between importers and suppliers. As CBAM evolves, transparent emissions reporting has become a differentiating factor, signaling a company’s commitment to sustainability.

However, even though EU importers and suppliers have the will to comply with CBAM, we still see situations where actual and accurate emissions data is not available, e.g. if data is pending for sub-suppliers etc. In these cases, it is possible to choose the options “Actual data not available” in the CBAM portal of the EU Commission when submitting the CBAM report. However, the report will in this case be seen as incorrect/incomplete, and the EU Commission has stated that reporting declarants must undertake all possible efforts to obtain actual emission data from their suppliers of CBAM goods. Where reporting declarants eventually fail to get data on actual emissions, the declarant must justify why the data is missing by e.g. uploading supporting documents attesting unsuccessful efforts and steps taken to obtain data from suppliers and/or producers.

Unreported emissions will as a starting point be subject to fines between EUR 10 and EUR 50 per tonne of unreported emissions. The competent authority (i.e. Energistyrelsen in Denmark) has latitude to consider the scope of the unreported information and the quantities of the unreported goods and the associated unreported emissions​. However, there is a risk of fines above EUR 50 EUR per tonne of unreported emissions, if incomplete or inaccurate reports have been submitted more than twice in a row, or if the reporting submissions have not been submitted in time. It must however be highlighted that we still need to see how practice in this area evolves to state anything with certainty when it comes to penalties for non-compliance.

Also, it should be noted that during 2025 EU importers must register as an authorised declarant to import CBAM products from 2026 and onwards. Further, importers should bear in mind that reported emissions will come with a (carbon) cost, as CBAM certificates must be purchased from 2026 partly covering the embedded emission of CBAM products. CBAM will be fully phased in in 2034, meaning that importers must purchase CBAM certificates covering 100% of the embedded emission of CBAM products (aligning with the phase-out of free allowances in the EU ETS).

The first year with CBAM highlights the importance of internal collaboration within the organisation, tech adaptation, data management, and supplier engagement. The expectation of CBAM costs has caused some companies to increase the price of their products, and some EU importers have actively chosen to chance the supply chain and source products within the EU, where possible, to completely avoid dealing with the CBAM reporting obligations.

It must however be underlined that CBAM is here to stay and that the EU plans to expand CBAM to more products before 2030. Also, the UK has adopted its own CBAM scheme coming into force on 1 January 2027 and being quite like the EU CBAM as for products in scope etc.

From a supplier perspective, CBAM could potentially act as a catalyst to gain competitive advantage by proactively disclosing emissions data and reduction strategies and demonstrating the low-carbon credentials of products, hence becoming the supplier of choice for EU importers. Likewise, from an EU importer perspective, CBAM could potentially act as a catalyst to do a full carbon footprint analysis of all goods purchased and sold and thereby in the end act to reduce carbon emissions to gain a competitive advantage.