A/ What is CBAM?
Climate change is a global problem that needs global solutions. CBAM stands for Carbon Border Adjustment Mechanism. It’s a policy tool designed to address carbon leakage and ensure a level playing field for industries in regions with different carbon pricing schemes.
B/ Why should we care?
We should care about CBAM because it helps to prevent carbon leakage, which occurs when industries relocate to regions with weaker climate policies to avoid carbon pricing or regulation. This can undermine the effectiveness of climate action and result in the shifting of emissions rather than their reduction. CBAM aims to address this by imposing a carbon price on imported goods based on their embedded carbon emissions, leveling the playing field for domestic industries subject to carbon pricing.
C/How does it work?
CBAM works by applying a carbon price to imports based on the emissions associated with their production. This can be calculated using various methods, such as the emissions intensity of the production process or the carbon price in the exporting country. Importers would then be required to purchase emissions allowances or pay a tariff corresponding to the embedded carbon emissions of the imported goods.
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined.
The revenue generated from CBAM could be used to support domestic industries transitioning to low-carbon technologies or to fund climate mitigation and adaptation efforts. Overall, CBAM incentivizes both domestic and foreign producers to reduce their carbon emissions, thereby contributing to global efforts to combat climate change.
D/ What is the timeline?
1/ Publication
The CBAM Regulation was published in the Official Journal of the EU on 16 May 2023.
2/ Transitional Period
From 1 October 2023, CBAM has entered into effect, starting with a transitional phase that runs until the end of 2025. During this period, EU-based importers of goods covered by CBAM from non-EU countries are obligated to report the embedded emissions of their imports, without incurring any financial liabilities.
The transitional phase will serve as a learning period for all stakeholders (importers, producers and authorities). It will allow the European Commission to collect useful information on embedded emissions in order to refine the methodology for the definitive period, which starts in 2026.
3/ Enforcement
The obligation to purchase and surrender CBAM certificates will then apply from 2026, effectively imposing a carbon price that should reflect the allowance price level in the EU ETS (Emissions Trading System).
In 2026 authorisation will be required to import CBAM goods, and reporting will switch to annual declarations. The supply of CBAM certificates is expected to be the financial levy that will be used to cover the GHG footprint from the data declarations made for the previous year.
E/ What are the implications?
CBAM mandates EU importers to embark on a comprehensive exploration of their supply chains. As a minimum, this entails understanding the origins of goods, but then collaboratively to determine the GHG emissions associated with those products.
F/ What are companies that import into EU need to do now?
The immediate steps such companies must take are:
– Assess the scope and origin of products imported.
– Assess the GHG data from companies outside the EU
– Establish a GHG reporting system that encapsulates both direct and potentially indirect emissions associated with imported items.
G/ So what should I do?
If your company is exporting to EU, you will be required to contribute your GHG data. Therefore you need to start tracking your GHG data and Aeterni’s Sustainability Consultants are here to help you do that.
2024 Feb 27 Update
Business Times
