The new emission trading system for imports – requirements and obligations for companies
Regulation (EU) No 2023/956 establishing a carbon border adjustment mechanism (hereinafter: CBAM Regulation) was published in the Official Journal of the European Union on 16 May 2023. The EU introduced a border adjustment mechanism for CO2 prices for imported goods. This is part of the “Fit for 55” package and is designed to implement the EU’s climate goals. In the future, a CO2 levy will be payable on certain goods imported into the EU from third countries.
The new emissions trading system for imports is intended to counter the problem and risk of so-called carbon leakage, i.e. the shifting of climate-damaging CO2 emissions to third countries and the associated increase in the CO2 content embedded in imported goods. Furthermore, the CBAM Regulation is intended to reduce global emissions, motivate third countries to protect the climate and thus implement the commitments of the Paris Climate Agreement.
The CBAM Regulation is similar to the European Emissions Trading Scheme already in force in the EU, which provides for a Union-wide CO2 price for energy-intensive sectors and which operates according to the so-called cap-and-trade mechanism. The CBAM Regulation is intended to gradually replace the free allocation of EU ETS certificates by 2034.
The CBAM Regulation’s scope of application
The CBAM Regulation imposes a CO2 price on EU imports of goods from emission-intensive sectors of the economy. In addition to regular imports of goods originating in a third country, processed products from those goods resulting from the inward processing procedure entering the customs territory of the Union are also covered by the CO2 price (cf. Art. 2(1) CBAM Regulation).
Initially, imports from the iron and steel, aluminum, cement, fertilizer, hydrogen and electricity sectors will be affected. This also affects some intermediate and finished goods from these sectors. It is expected that the CBAM Regulation will be applied to other goods as well in the future.
The question of whether a good falls within the substantive scope of the CBAM Regulation is determined on the basis of the respective CN Code (cf. Annex I CBAM Regulation). The CBAM Regulation provides for exceptions and special arrangements, particularly in the area of imports of electricity.
Goods originating in countries whose emissions trading system is linked to the EU’s do not fall within the scope of the CBAM Regulation. These include Switzerland, Norway, Iceland and Liechtenstein. Furthermore, goods originating in the territories of Ceuta, Melilla, Büsingen, Helgoland and Livigno are excluded from the scope of the CBAM Regulation.
Requirements companies must fulfill
Pursuant to the CBAM Regulation starting 1 January 2026 goods falling within the scope of application of the CBAM Regulation may be imported only by so-called authorised CBAM declarants (cf. Art. 4 CBAM Regulation).
Applications for authorisation may be submitted to the competent authority starting on 31 December 2024. The necessary requirements and contents of the application for authorisation must be fulfilled. These are set out in Art. 5 CBAM Regulation and are in part similar to the customs requirements for an Authorised Economic Operator (AEO). If necessary, a guarantee may also be required in this context.
Authorised CBAM declarants will be entered into a CBAM registry, which is the central administrative platform of the CBAM Regulation. Here, all central information is deposited and managed throughout the Union.
Obligations imposed on companies to surrender CBAM certificates
All companies importing goods that fall within the scope of the CBAM Regulation will be required to surrender CBAM certificates via the CBAM registry from 1 January 2026, corresponding to the so-called embedded emissions associated with the imported goods.
The determination of the required number of CBAM certificates is based on the amount of embedded (direct) emissions released during the production of the imported goods in the respective facility in the third country. Indirect emissions resulting from the use of the electricity used for manufacturing are also subject to the CBAM Regulation. In this context, the CBAM Regulation provides for different calculation methodologies and formulas for simple and complex goods.
It is assumed that the standard basis for the calculation will be the actual emissions (plus emissions from input materials, if applicable). If these cannot be determined, default values according to the specific emissions during production in the third country or, if applicable, so-called alternative (worst-case) default emission values of a reference group in the EU must be used.
CO2 prices which have already effectively been paid in a third country may reduce the number of CBAM certificates required.
For iron, steel, aluminum and hydrogen products only embedded emissions are taken into account because the CBAM Regulation is intended to establish a CO2 adjustment mechanism and not impose double taxation on the products concerned. Special rules once again apply to electricity.
In addition, the authorised declarant is subject to certain record-keeping obligations. These include certain minimum data to be recorded with regard to the imported goods, the records of which must be kept for a certain period of time (cf. Art. 7 in conjunction with Annex V CBAM Regulation).
The CBAM declaration
In the future each authorised CBAM declarant shall be obligated to use the CBAM registry to submit a CBAM declaration for the preceding calendar year by 31 May of each year (cf. Art. 6 CBAM Regulation). Special rules apply to the inward and outward processing procedure and returned goods.
The verification of the calculation shall be carried out by an accredited verifier.
It is possible for an operator of an installation in a third country to register the information on that operator and on its installation in the CBAM registry so that the emissions released can be verified.
Purchase and surrender of certificates
The authorised declarant is obliged to purchase one CBAM certificate for each tonne of CO2 emissions associated with its imported goods. The certificates can be purchased by the authorised declarants from the respective Member States via an EU-wide common platform. The price of the CBAM certificates is an average price based on an established auctioning procedure. The price of a CBAM certificate is based on the average closing prices of EU ETS allowances for the previous week.
The number of CBAM certificates purchased by the authorised declarant must correspond to the embedded emissions declared in the CBAM declaration and which were determined by reference to the direct emissions.
In doing so, the authorised declarant must ensure that a certain number of certificates is held in its account at the end of a quarter. Corrections in the surrender of CBAM certificates and any repurchases by a Member State/European Commission are possible within certain limits and under certain conditions.
Review by the Commission
The Commission has the oversight role in the review of CBAM declarations. The Commission shall review CBAM declarations according to risk factors, communicate the information available to it to the competent authorities of the Member States and cooperate with them. Economic operators must therefore be prepared for potential controls and checks or recalculations. In doing so, the Commission shall also combat circumvention practices that seek to undermine the scope of the CBAM Regulation; the CBAM Regulation provides for penalties in such cases.
Transitional period and reporting obligations starting 1 October 2023
The CBAM Regulation will already become applicable in part starting 1 October 2023.
As of this date, customs declarants are required to submit a so-called CBAM report on a quarterly basis. This report must include goods that were imported in this quarter and submitted no later than one month after the end of that quarter. The required content is set forth in Art. 35 CBAM Regulation. Although a calculation of the emissions has to be made already during the transitional phase, no certificates have to be acquired yet. Special rules apply to processed products and returned goods. In this phase, too, the Commission and the national authorities may already check the data.
The draft implementing regulations of the Commission (CBAM-IA), which have meanwhile been published, contain initial details on which specific reporting obligations already have to be fulfilled by the companies in the transitional phase. The scope of the information to be submitted in the CBAM report is considerable. The majority of the data fields are mandatory. In the case of inward processing, further additional information must be provided.
Advice for the practice
The CBAM Regulation will have far-reaching effects on the import of goods into the EU and will entail additional administrative and, in some cases, financial burdens for the companies concerned. These include, above all, the document retention obligations associated with the CBAM Regulation, the obligation to provide evidence and the procurement of information along the supply chain.
Against the backdrop of the transitional phase, which already starts in October, and the associated administrative and financial burdens for imports, it is advisable for economic operators to deal with the issue now. This is the only way to ensure timely and adequate implementation in the company so that all organisational, administrative and, if necessary, calculatory requirements are met in good time. This is because the introduction of CBAM has an impact on the entire supply chain.
If a company fails to comply with the applicable obligations, the first penalties may be imposed as early as October.
The necessary structures must be created as quickly as possible in the company and in the foreign supplier’s companies in order to implement the obligations under CBAM. Above all, determining the necessary CBAM certificates and calculating the actual emissions can lead to problems. This is because it may not always be possible to obtain the necessary well-grounded data from third countries. Problems could also arise in dealing with inward processing, as initial analyses show that in certain processing constellations there could be conflicts with the CBAM Regulation, which in turn would result in disadvantages for importers.
As the regulation is new, not all concrete practical implementation measures are known yet. For example, national responsibilities have not yet been finalised, and the specific implementing provisions have yet to be adopted. However, the drafts of these provisions provide an initial indication of, for example, which default values are to be used as the basis for calculating emissions in the future, how data for calculating emissions is to be determined, how emissions are to be calculated in certain cases, and precisely what information is to be included in the CBAM report during the transition phase.
We will keep you up to date on any developments in this area in our newsletter. If you have any questions about the requirements and obligations that CBAM will place on companies in the future, AWB will be happy to advise you.
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Carbon Border Adjustment Mechanism
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