Osrich | Understanding CBAM: Duties & Implications For EU Importers

In an era of escalating environmental challenges, the European Union (EU) introduces a groundbreaking policy: the Carbon Border Adjustment Mechanism (CBAM). This article offers an in-depth exploration of CBAM, a strategic initiative designed to harmonize the EU’s ambitious climate objectives with international trade practices. By addressing the complexities of carbon leakage and establishing a level playing field for domestic and foreign producers, CBAM marks a significant step in the EU’s journey towards a sustainable future.

This comprehensive overview examines the mechanism’s implementation phases, affected sectors, and the specific responsibilities imposed on EU importers. Furthermore, it highlights the reporting requirements and potential consequences of non-compliance, providing a detailed guide for stakeholders navigating this new regulatory landscape.

WHAT IS CBAM?

The CBAM represents a crucial environmental policy tool of the EU, designed to bolster its ambitious climate objectives. This mechanism aims to cut greenhouse gas (GHG) emissions by at least 55% by 2030, advancing towards climate neutrality by 2050. Aligned with the EU Emission Trading System (EU ETS), CBAM forms part of the “Fit for 55” package, specifically addressing the risks of carbon leakage – a phenomenon where production migrates outside the EU due to varied emission costs.

Previously, to mitigate carbon leakage, certain industries received free emission allowances under the EU ETS. However, CBAM introduces a paradigm shift. It aims to level the playing field by imposing comparable carbon costs on imports from non-EU countries, focusing on sectors at high risk of leakage, such as cement, iron, steel, aluminum, fertilizers, hydrogen, and electricity, including certain related products.

CBAM’s rollout involves two phases: a transitional period (October 2023 to December 2025) focusing on data reporting without financial implications, followed by a definitive period commencing January 2026. In the latter phase, embedded emissions will gradually come under CBAM obligations, with free allowances phased out by 2034. This approach mirrors the EU ETS, requiring EU operators to pay for emissions and importers to acquire CBAM certificates reflecting EU ETS prices. Compliant with World Trade Organization regulations, CBAM uniformly applies to all imports from outside the EU.

WHICH EXPORTS INTO THE EU ARE CONCERNED BY CBAM?

The CBAM primarily impacts imports into the European Union of certain carbon-intensive products. The affected exports into the EU encompass:

Cement: Focusing on carbon emissions from the production of cement, cement clinker and aluminous cement.

Iron and Steel: Includes a wide range of iron and steel products like sintered ore, FeMn, FeCr, FeNi, crude steel, etc., focusing on their production emissions.

Aluminum: Encompassing both unwrought aluminum and aluminum products, including primary production and secondary recycling routes.

Fertilizers: Concerns imports of fertilizers, especially nitrogenous types, ammonia, nitric acid, and urea, with a focus on production emissions.

Hydrogen: Applies to hydrogen imports, particularly production of pure hydrogen or hydrogen-nitrogen mixtures used in ammonia production, considering carbon intensity of production methods.

Electricity: Including imported electricity, where generation emissions are critically assessed.

In these sectors, the CBAM considers both direct and indirect emissions related to production, such as those from electricity and fuel consumption, as well as process emissions. The goal is to ensure a level playing field for EU producers who are subject to stricter carbon regulations, thus reducing the risk of carbon leakage. Importers of these goods will need to report and potentially pay a carbon price based on the embedded emissions.

HOW WILL THE CBAM WORK?

As a key instrument in the EU’s climate policy, CBAM aligns international trade with environmental goals. Its implementation involves various procedural and administrative steps, ensuring a fair and efficient system for managing carbon costs of imported goods.

1. Reporting and Data Collection: Importers must submit detailed quarterly reports on embedded emissions in their imports, primarily sourced from foreign producers. This includes both direct and indirect emissions. Where direct data is unavailable, EU-established default values must be used.
2. Customs Integration: CBAM will integrate with the EU’s existing customs system. Import declarations must match with CBAM reports for compliance.
3. Emission Certificates and Financial Obligations: After the transitional period, importers must buy CBAM certificates, equating to the carbon price applicable if the goods were produced under EU rules. The price of these certificates aligns with the EU ETS.
4. Compliance and Penalties: The European Commission and member state authorities will oversee compliance. Non-compliance may result in penalties, maintaining the mechanism’s integrity.
5. Dynamic Adjustment and Global Interface: The CBAM is adaptable to changing global climate policies and trade patterns, fostering global dialogue on carbon pricing and environmental standards.

SCOPE OF EMISSIONS COVERED IN THE CBAM?

The CBAM focuses on two primary categories of greenhouse gas emissions associated with imported goods: direct (Scope 1) and indirect (Scope 2) emissions.

• Direct Emissions (Scope 1): These are emissions released directly from sources that are owned or controlled by the company. In the context of imported goods, this includes emissions from the combustion of fossil fuels in production processes, such as burning coal, oil, or gas in factories or plants. It also covers emissions from chemical processes in industries like cement or steel manufacturing, where CO2 is released as a direct byproduct of the production process. These emissions are typically measured and reported at the site where they occur.
• Indirect Emissions (Scope 2): This category encompasses emissions primarily associated with the generation of purchased electricity, steam, heating, or cooling that is consumed by the production process. For example, if a factory uses electricity from a coal-fired power plant, the emissions from the coal combustion at the power plant are considered indirect emissions of the factory. These emissions are not released at the factory itself but are a consequence of the energy used in the manufacturing process.

By addressing these emission categories, CBAM aims to encompass the majority of emissions related to manufacturing, holding producers accountable for both direct production emissions and those from their energy use.

DUTIES AS AN EU IMPORTER UNDER THE CBAM

EU importers under CBAM have several responsibilities:

1. Quarterly Reporting: In the transitional phase, importers are required to submit quarterly reports detailing the embedded emissions in their imported goods. This involves breaking down both direct and indirect emissions and noting any carbon pricing paid in the country of origin.
2. Data Collection and Verification: Importers must request specific data on the embedded emissions of CBAM goods from their foreign suppliers or operators. This data collection might involve intermediary traders and requires diligent tracking and verification.
3. Adherence to Deadlines: The first report for the period October to December is due by the end of January the following year, with subsequent reports following a similar quarterly pattern. Importers need to be vigilant about these deadlines to avoid penalties.
4. Accuracy and Corrections: Given the importance of accurate reporting, importers have the obligation to correct any submitted reports within two months of the reporting quarter’s end. This timeframe is extended for the first two reports, reflecting the initial setup challenges.
5. Communication and Rectification: Importers should maintain open communication with operators to ensure the accuracy of data. If any issues are identified by the Commission or competent authorities, importers are responsible for addressing and rectifying these issues in future submissions.
6. Compliance with Inward Processing Rules: For goods under the inward processing procedure, importers must report the quantities and embedded emissions once these goods are released to the EU market. This includes detailing the country of origin and the production installations.

REPORTING OBLIGATIONS FOR EU IMPORTERS

CBAM imposes specific reporting obligations on importers:

• Transitional Period (1 October 2023 to 31 December 2025): Importers must report quarterly on the embedded emissions, which include detailed data on emissions from both the production process and the precursors.
• Definitive Period (Post-2025): The emphasis shifts to annual reporting where the importers are required to account for and surrender CBAM certificates equivalent to the total embedded emissions of the imported goods, including those from precursors.

The CBAM report requires detailed submissions to track carbon emissions from imports meticulously. Key information includes the reporting declarant’s identity, address, and role, plus the identification and details of importers and representatives. It mandates the comprehensive documentation of each imported item, including commodity codes, country of origin, and explicit descriptions. The report demands data on the quantity of goods under various customs procedures, incorporating inward processing specifics. Notably, it covers the total emissions (direct and indirect) associated with the goods, indicating the measurement units used.

Additionally, the report requires details on the production method and parameters for emissions, ensuring transparency in environmental impact. Supporting documents are crucial, providing in-depth emission sequence data, installation details, and the calculated carbon price due. This report forms a complete framework for environmental accountability, linking imported goods to their carbon footprint.

CONSEQUENCES OF NON-COMPLIANCE

Non-compliance with CBAM regulations results in penalties:

1. Circumstances for Penalties: Penalties are imposed for failure to submit reports or for incorrect/incomplete reports that are not corrected after notification.
2. Penalty Amount: Ranges from EUR 10 to EUR 50 per ton of unreported emissions, adjusted according to the European index of consumer prices.
3. Factors Influencing Penalty Severity: Considerations include the extent of unreported information, quantities of unreported goods, the declarant’s willingness to provide information, intent, past compliance history, and level of cooperation.
4. Increased Penalties for Continuous Non-Compliance: Higher penalties apply for repeated failures or prolonged non-compliance.

These penalties emphasize the importance of accurate and timely reporting under CBAM, balancing enforcement needs with considerations of intent and past behavior.

CONCLUSION

The CBAM represents a significant step in the EU’s climate strategy, balancing environmental responsibility with fair international trade. It aims to mitigate carbon leakage by imposing similar carbon costs on imports from high-emission sectors, thereby maintaining a level playing field. The mechanism’s phased approach, from initial reporting to financial compliance, demonstrates the EU’s commitment to a practical and rigorous environmental policy. Strict penalties ensure adherence, emphasizing the seriousness of these initiatives. While this text has focused on CBAM’s structure and impact on EU importers, our upcoming discussion will shift to the duties and implications for non-EU producers. This next piece will highlight how CBAM influences global production patterns, encouraging a worldwide transition to sustainable practices.

References:

1. CBAM Regulation: European Parliament and Council. (2023). Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism. Official Journal of the European Union.
2. Implementing Regulation: European Union. (2023). Regulation (EU) 2023/1773 of 17 August 2023 laying down the rules for the application of Regulation (EU) 2023/956 of the European Parliament and of the Council as regards reporting obligations for the purposes of the carbon border adjustment mechanism during the transitional period. Official Journal of the European Union.
3. CBAM Guidance: European Commission. (n.d.). Guidance document on CBAM implementation for importers of goods into the EU.

 

For more information, please contact the author: Clement Silva, Managing director OSRICH SA

Compliments of OSRICH SA – a member of EACCNY