Understanding the Carbon Border Adjustment Mechanism (CBAM)

CBAM at a glance

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The European Union adopted the Carbon Border Adjustment Mechanism (CBAM) as part of the FIT for 55 package in 2023. This regulation aims to address the challenge of carbon leakage, and encourage sustainable business practices.

‍Carbon Leakage occurs when businesses shift their production processes to countries with less stringent environmental policies or fewer climate actions due to cost pressures, potentially increasing overall emissions. CBAM puts a price on carbon emissions embedded in imported goods, levelling the playing field for EU industries. It complements the EU Emissions Trading System (EU ETS), which already puts a price on carbon for EU companies. The CBAM is designed to support the EU’s goal of achieving climate neutrality by 2050. Under this regulation, imported goods into the EU are subject to a carbon price. By ensuring fair competition and encouraging global emissions reductions, CBAM is a crucial step towards a greener future.

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Does CBAM apply to your Business?

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If your business imports cement, aluminium, iron and steel, fertilisers, electricity, or hydrogen, CBAM may directly impact you.

These sectors are targeted due to their high greenhouse gas (GHG) emissions  released into the atmosphere during production processes and are prone to carbon leakage. Under CBAM, there will be costs associated with the carbon emissions embedded in imported goods into the EU. However, consignments and goods valued under €150, as well as goods used in the military activities, are exempt.

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How does the system work?

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CBAM has two phases:

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1. ‍Monitoring Phase(until 31^st December 2025): This is a preparatory period to familiarise businesses with the system. Importers need to submit quarterly reports, including the direct and indirect emissions associated with their imported goods into the EU, but there is no financial penalty.‍
2. Full Implementation Phase(from 1^st January 2026): CBAM becomes mandatory. Importers must submit annual declarations and apply for carbon certificates.

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Streamline your reporting: Stay updated and deepen your knowledge

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CBAM will apply to imports of certain goods and selected precursors listed in Annex I of the Regulation, whose production is most at risk of carbon leakage. Annex I provides a comprehensive list of these goods to address greenhouse gas emissions embedded in the imports and prevent carbon leakage.

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CBAM Reporting: Five Key Steps for Importers

CBAM Takeaways

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The CBAM plays a pivotal role in the European Union’s strategy to combat climate change and promote global sustainability. By applying a carbon price on imported goods, CBAM aims to prevent carbon leakage. This mechanism not only reinforces the EU’s commitment to reducing carbon greenhouse gas emissions but also sets a precedent for other countries to adopt similar policies, fostering a more effective global response to climate change.

Written by Gabriela Cirdei

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CBAM compliance made easy: Navigate and comply with Arete Zero Carbon.

We offer resources and support to ensure a smooth transition through the CBAM reporting process.

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References

• ‍Regulation (EU) 2023/956‍
• European Commission – CBAM explanation and its applicability
• CBAM Questions and Answers
• Council of the EU, “ Fit for 55': Council adopts key pieces of legislation delivering on 2030 climate targets”
• The Paris Agreement, UNFCCC
• LME,CBAM Consultation and Sustainability Discussion
• House of Commons Library, Carbon Border Adjustment Mechanism
• German Environment Agency, Third-country carbon pricing under the EU CBAM