What is the Carbon Border Adjustment Mechanism (CBAM) and how does it affect your company?

Is your organization importing iron, steel, cement, aluminum, fertilizer, hydrogen, or electricity from outside of the EU? The new year has  brought new EU reporting regulation (CBAM) regarding imports of these high-carbon goods. How can your company turn this reporting requirement into a competitive advantage?

The Carbon Border Adjustment Mechanism or CBAM is an EU policy with the goal of regulating the emissions of imported goods into the EU and thereby reducing carbon leakage. CBAM entered its transitional phase in October 2023. This means that companies that are importing good belonging to the six initial categories subject to the CBAM are obligated to report the emissions associated with those products on a quarterly basis as of January this year.

What are the obligations of companies under the CBAM?

During the transitional phase, companies will only be reporting on the embedded emissions associated with their imported goods. If companies fail to submit a CBAM report, or if the report is incorrectly filed or incomplete, penalties will be applied. Penalties range between 10 and 50 EUR per CO2 tonne of unreported embedded emissions¹.

In just two years, starting in January 2026, companies will also need to purchase so-called CBAM certificates to cover the embedded emissions of the imported goods. The value of the certificates will be determined by EU ETS pricing. In other words, imported products will be subject to a carbon “tax” at the border to ensure that the price of importing a high-carbon good matches that of producing the good in the EU. If a carbon price has already been paid outside the EU, this will be subtracted from the adjustment to avoid double charging. This carbon price could, for example, have been paid to non-EU cap and trade schemes, but could also reflect the decarbonizing efforts of the exporting company. The EU is expected to produce more concrete rules around how carbon prices paid elsewhere will be accounted for when determining the price importers will need to pay for embedded emissions.

All this is meant to incentivize both EU buyers and non-EU sellers of the imported goods to lower their required CBAM payments by engaging in decarbonization efforts.

I’m importing one or more of these goods, what do I do?

To kick-start a company’s CBAM reporting and management process, it is important to first determine which of the company’s products fall under CBAM reporting. Then, following the EU’s guidance, companies can determine what emissions they need to consider from the production of the goods, and from there determine their data needs in order to fulfill reporting the requirements.

In practice, the importer is obliged to collect emissions information regarding its imported CBAM goods from the supplier in question. The EU has developed a detailed data collection template, defining what data the suppliers should collect and report, and how to calculate the emissions related to its goods.  The importers can report using “default values” given by the EU until Q2 2024, but after that need to be able to report based on “real emissions information” from each supplier. One challenge is how to motivate suppliers to gather emissions data and respond to emissions data requests, as this requires both resources and competencies at the supplier’s end.

Turning obligations into opportunities

The reporting process may seem cumbersome, but it will support importers in getting a detailed understanding of the CO2 emissions in their supply chain. This valuable information will not only help with complying with the CBAM reporting requirements (and climate-related CSRD reporting), but also help drive decarbonization efforts in the importer’s supply chain. Forerunners will use the data and insights the CBAM process provides to set emission reduction targets, engage with suppliers, and innovate for low-carbon strategies and business models.

Looking for more insights and hands-on support in the world of CBAM? Gaia can help every step of the way, from initial scoping and interpreting reporting requirements all the way to making climate a competitive advantage.

1 Article 16(2) of the Implementing Regulation

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