EU: European Parliament adopts rules for carbon border adjustment mechanism (CBAM)

The European Parliament on 18 April 2023 adopted rules for the new carbon border adjustment mechanism (CBAM), which is scheduled to begin its transition phase on 1 October 2023.

During the transition phase, EU importers of goods covered in the scope of the CBAM regulations will be required to submit quarterly reports of the embedded emissions of these goods to the European Commission. 

Currently, carbon-intensive sectors such as aluminum, cement, iron and steel, fertilizers, hydrogen and electricity are covered by CBAM. However, it is expected that CBAM will be extended in the coming years to all products covered by the EU Emissions Trading System (ETS).

CBAM was first introduced as a part of the European Green Deal, which serves as a guide for both tax and non-tax policy initiatives in the EU to achieve its ambitious target of becoming climate neutral by 2050.

This was followed by a proposal for a regulation on CBAM on 14 July 2021 as part of the “Fit for 55” policy package, aiming to reduce greenhouse gas (GHG) emissions by at least 55% by 2030, from the levels of 1990. This is an objective and policy plan in line with the EU’s commitment to global climate and its ambition to achieve the targeted climate neutrality of 0% net emissions by 2050, as part of the EGD.

CBAM levies a carbon price on the imports of the target goods with the intention of equivalent carbon pricing on imports, mirroring the EU ETS for production in the EU. This is to ensure the competitiveness for both the manufacturers of the ETS-covered goods in the EU and the importers of CBAM-covered goods in the EU, making the Customs Union attractive for those companies and countries which produce and export less emission-intensive goods. Conversely, it signals disruptive changes and new roles and responsibilities for the customs authorities in the EU, as well as companies importing the covered goods.

CBAM, as a new carbon pricing framework in the EU, is certain to have a disruptive impact on the companies trading in the growing list of covered commodities. It is also expected to have a disruptive impact on general global trade as measures such as CBAM will probably become the new normal. Countries such as Canada, New Zealand, Australia, India and the UK are already in discussion about a CBAM for their countries.

The latest adoption of CBAM by the European Parliament has rapidly evolving consequences for businesses involved in the import of certain goods into the EU with high GHG-embedded emissions. The existing list of CBAM goods is clearly defined in the regulation and includes the customs classification codes.

It is critical for companies and importers of CBAM goods into the EU to remain well-informed of these developments and begin evaluating the overall impact on their business activity, which may not be limited to their customs data only. CBAM could have a cross-functional impact on their sourcing, supply chain, and logistics, as well as sustainability initiatives. Quantifying the carbon footprint, and the exposure to carbon costs is the next step for companies targeted by CBAM, along with a set of administrative measures and financial obligations.

The most urgent requirement for EU companies to be CBAM compliant is the adherence to reporting obligations from 1 October 2023. Businesses are required to report on a quarterly basis, the embedded emissions in the imported goods (during that quarter of a calendar year). As part of their reports, businesses must detail both the direct and indirect emissions, as well as any carbon price effectively paid in the country of origin.

Businesses will be required to fully adapt to the CBAM regulations by 1 January 2026. Before this date, importers of CBAM goods in the EU must acquire the status of authorized CBAM declarant. Without it, they will no longer be able to import these goods into the EU customs territory. For this authorization, businesses are advised to begin registration by 2025.

Read an April 2023 report prepared by the KPMG member firm in Belgium

Read an April 2023 report prepared by the KPMG member firm in the Netherlands