Understanding the Functioning of the Carbon Border Adjustment Mechanism

Understanding the Functioning of the Carbon Border Adjustment Mechanism

The CBAM will be applicable to goods originating from countries not covered by the EU ETS, encompassing products entirely produced outside the EU as well as those substantially manufactured beyond its borders.

Designed to support businesses during this transitional phase, the CBAM gradually extends its reach. Commencing on October 1, 2023, the transitional period marks the onset, wherein importers of specified carbon-intensive goods, vulnerable to carbon leakage, must report the greenhouse gas emissions embedded in their imports. However, during this stage, no financial payments are expected.

The goods falling within the CBAM's transitional phase include:

• Iron and steel

• Cement

• Aluminium

• Fertilisers

• Electricity

• Hydrogen

• Some downstream products containing iron and steel, such as screws and nails

By 2026, the transitional period will conclude, mandating importers to commence payments for adjustments. This ensures parity in carbon pricing between imports and domestic products, safeguarding the EU's climate goals. Moreover, there's potential for an expansion in the scope of CBAM requirements at this juncture, with additional goods possibly becoming subject to the carbon levy.

The CBAM transition period

The transition period for implementing the CBAM commenced in October 2023 and will extend until December 2025. This phase is intended to facilitate a gradual integration of the CBAM, allowing businesses both within and outside the EU to adapt to the new system.

During this initial phase, businesses will primarily be obligated to report greenhouse gas emissions (GHG) embedded in their imports. They will be granted some flexibility in reporting methods. In the first year of implementation, businesses can choose from three reporting options:

• Full reporting in accordance with the new EU methodology

• Reporting based on equivalent third-country national systems

• Reporting based on default emissions data (also known as default values or reference values)

However, starting from January 2023, only the EU methodology will be accepted.

To assist importers in calculating and reporting emissions during the CBAM transitional period, the European Commission has developed comprehensive guidance, IT tools, training materials, and tutorials. These resources are available on the European Commission's website to support the implementation of CBAM.

Explore insights in our next blog about "CBAM Post-2026: Expansion and Future Directions".