The EU’s Carbon Border Adjustment Mechanism (CBAM) Regulation

Despite global efforts to bolster climate change mitigation strategies and enact new legislation, the issue of carbon leakage remains persistent. This phenomenon arises when companies operating in countries with stringent climate policies opt to shift their carbon-intensive production operations to nations with less stringent emissions regulations. Carbon leakage also occurs when products from a climate-friendly country are substituted by imports with high carbon footprints.

To counter carbon leakage, the European Union (EU) officially entered into force the Carbon Border Adjustment Mechanism (CBAM) on May 16, 2023. The mechanism aims to level the economic playing field by equitably pricing the carbon emissions linked to the production of carbon-intensive goods that enter the EU market. It will also be a key strategy to incentivize cleaner manufacturing processes in exporting countries outside the EU. In this article we will look into the CBAM in more detail and what it means for companies selling products in the EU.

What is the Carbon Border Adjustment Mechanism (CBAM)?

In essence, CBAM is a tariff that the European Union and other regions will impose on imported goods based on their carbon footprints. It serves two primary purposes. The first is that the EU wants to protect domestic industries that may be at a competitive disadvantage against those in regions with lenient or no carbon regulations. The second is to encourage other countries to adopt carbon pricing or other concrete measures to reduce emissions. If they don’t, their exports will be subject to hefty tariffs. Given the implications of CBAM, companies worldwide will need to re-evaluate their operations to maintain competitiveness and ensure compliance.

TRACK YOUR CARBON FOOTPRINT

WHO NEEDS TO COMPLY WITH CBAM?

The CBAM will initially target sectors that develop products with a high potential for carbon leakage, such as iron, steel, cement, electricity, hydrogen and fertilizers. As the CBAM is gradually phased in, its scope and coverage will expand. When the CBAM is fully phased in as of 2026, proponents hope that it will cover over 50% of carbon emissions sectors currently regulated by EU Emissions Trading System (ETS). The EU ETS is a cap-and-trade system that places limits on carbon emissions from various sectors. Companies in these sectors are currently provided with free allowances under the ETS as a transitional measure to help them adjust to carbon pricing.

CBAM TIMELINE

The CBAM will start applying as of October 1, 2023, with no financial adjustments, continuing in a transitional phase until January 2026. During this time, importers of products under the CBAM’s initial scope will only have to report, on a quarterly basis, the greenhouse gas emissions—direct and indirect—associated with their imports and any carbon prices paid abroad. During the transition, reporting companies will not have to make any compensations.

As of 2027, companies will have to use the CBAM registry to submit a declaration for the preceding year (in this case, 2026) and provide certificates that prove that the declared emissions have been verified. While 2027 seems a few years off, the urgency to prepare for companies in the EU and businesses exporting to the EU has never been greater. They will need to set up carbon tracking and accounting systems to trace, measure and verify direct emissions from their operations as well as indirect emissions from their entire supply chains. Carbon accounting must take into account emissions from the entirety of their product lifecycle.

Detailed reporting will become mandatory. Businesses will be required to provide comprehensive, accurate and up-to-date evidence of their carbon footprints, making third-party verification crucial. Misreporting or inadequate reporting could lead to penalties.

CBAM: TRANSFORMING THE WAY COMPANIES OPERATE IN OR CONDUCT BUSINESS WITH THE EU

The ripple effects of the CBAM don’t end with carbon accounting and reporting. In order to remain competitive and in business with the EU, companies will have to scrutinize their supply chain suppliers to rethink their partnerships—either by working together to reduce emissions or scouting out other vendors with lower carbon footprints.

Furthermore, there will be an increased emphasis on research and development (R&D) to implement cleaner technologies and processes to reduce the total carbon content of their goods. Massive investments in R&D may even lead some companies to adjust their prices to offset mounting CAPEX and OPEX as well as the added carbon costs.

HOW OPTEL CAN HELP COMPANIES PREPARE FOR AND ENSURE CBAM REGULATORY COMPLIANCE

OPTEL’s Carbon Tracking Solution has been designed specifically with robust capabilities to calculate greenhouse gas (GHG) inventories and accurately monitor, in real time, Scope 1, 2, and 3 emissions. Our solution helps business leaders identify carbon hotspots and make informed decisions on where to focus reduction efforts. Developed to work with third-party systems across an entire upstream and downstream value chain, OPTEL’s Carbon Tracking Solution produces reliable carbon-footprint declarations for any type of product and in accordance with CBAM’s reporting standards.

Another bonus? OPTEL does not just provide a product lifcycle traceability platform. Our regulatory compliance experts understand the CBAM’s intricate details and how they apply to specific businesses. Tapping into our expertise can simplify and accelerate your organization’s compliance with the CBAM. You can contact us today for a no-obligation assessment of your unique context.

The CBAM will inevitably change the landscape of international trade and business operations. Proactive preparation and the right technological solutions will be crucial. As with any regulatory change, there will be challenges, but there also lies an opportunity for businesses to lead the way to a low-carbon future.

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