How to Stay Ahead of the ‘Carbon Curve’
Matthew Germain, Co-lead of Net Zero Policy and Regulation at Osborne Clarke, highlights incoming measures under the EU Carbon Border Adjustment Mechanism.
The EU Carbon Border Adjustment Mechanism (CBAM) already places demanding obligations on companies – and these are set to increase from 2026. However, among the long list of new EU sustainability legislation, the CBAM has gone under the corporate radar.
In force since 1 October 2023, the EU CBAM places obligations on importers on a staggered basis during a transition period that runs to the end of 2025. Although these obligations relate to the EU mechanism, UK businesses should take heed that the Labour government is committed to a UK CBAM that is expected by 2027.
What is CBAM?
A CBAM addresses the risk of carbon leakage, which occurs when environmental regulations or high carbon taxes incentivise carbon-intensive industries to relocate to countries with more relaxed climate policy regimes – only to export goods back to their original market.
The EU’s CBAM is designed to equalise the carbon costs applied to imported goods and domestic goods. Acting as a tax on imported carbon, the CBAM should ensure that imported products are subject to a regulatory system that applies carbon costs equivalent to those applied under the bloc’s Emissions Trading System.
The current obligation is limited to quarterly reporting, with additional obligations coming in which will require importers to apply for “authorised CBAM declarant” status, submit a CBAM declaration and surrender CBAM certificates.
Who is caught by the EU CBAM?
With such extensive obligations, the first step for companies is to determine whether they fall under the EU CBAM.
Obligations apply to the entity that imports goods into the EU. To be an importer for the purpose of EU CBAM, the importer must meet the prescribed definition. An importer is defined under the CBAM regulation as “the person lodging a customs declaration for release for free circulation of goods in its own name and on its own behalf, or where the declaration is lodged by an indirect customs representative, the person on whose behalf such declaration is lodged”.
Complications can arise when more than one party is involved in the importation process. When this occurs, the CBAM guidance confirms that each tonne should neither be reported twice nor omitted from reporting.
The importer must be importing goods as specified in the EU CBAM into the customs territory of the Union, which include certain goods made from cement, electricity, fertilisers, iron and steel, aluminium or chemicals. These goods must also have an intrinsic value of €150 (US$158) or more.
EU importers should also check the originating countries and territories in their supply chains, as a small number are excluded from the scope of EU CBAM.
What must importers report?
Importers, once they have established that the EU CBAM applies, must then navigate the staggered obligations until the end of the transition period on 31 December 2025.
The only obligation currently in force is a reporting requirement. Importers must produce a report to the European Commission on a number of prescribed carbon emission-related matters. The CBAM report must cover the total quantity of each type of good, the actual total embedded emissions, indirect emissions and the carbon price due in the original country for the embedded emissions.
A report is required for every quarter that goods within the scope of CBAM are imported into the EU customs union. Given the regularity of disclosures and the requirement to submit a CBAM report within a month of the end of the relevant quarter, it is vital that importers have access to complete and accurate records of the required data.
Registration obligations coming
From 31 December 2024, there will be a second requirement on importers. Before 1 January 2026, EU importers will need to complete their applications for registration as authorised CBAM declarants, or risk being prohibited from importing goods into the EU after that date.
To achieve authorised CBAM declarant status, the importer must prove it has not been involved in any serious or repeated breaches of customs legislation, taxation rules, market abuse rules or the EU CBAM itself, and demonstrate financial and operational capacity to fulfil its CBAM obligations.
It is, therefore, critical that those intending to import goods into the EU from 2026 look to use 2025 to complete the registration process.
Declaration and certificates pending
From 1 January 2026, the authorised CBAM declarant will be obliged to submit an annual declaration for the preceding year on 31 May (that is, from May 2027) and surrender CBAM certificates.
A CBAM declaration must be submitted to the CBAM registry and should cover some of the same matters as included in a CBAM report. In addition, it must state the total number of CBAM certificates to be surrendered. Certificates are to be purchased by authorised CBAM declarants to the value of the carbon costs they would have paid had the goods originated in the EU. These must then be surrendered corresponding to the value of embedded emissions specified in their CBAM declaration.
At the end of each quarter, authorised CBAM declarants must ensure that they hold CBAM certificates corresponding to at least 80% of the embedded emissions in all goods it has imported since the beginning of the calendar year.
Failure to surrender the correct number of CBAM certificates can result in a penalty, currently set at €100 for each tonne of carbon dioxide equivalent emitted, and the requirement to purchase the outstanding CBAM certificates on top of the penalty payment.
Get ready
It is essential to start preparing now.
First, to determine the full extent of the EU CBAM obligations, it is critical that businesses review their product list and supply chains to identify who meets the definition of “importer”.
Companies, once they have established the EU CBAM applies, will need to ensure that they are collecting the required data to prepare a quarterly report on their embedded carbon emissions.
With lead times on registration approval unknown and the severe consequences of failure to obtain this status, importers will also need to be proactive during 2025 in gathering the supporting information for their authorised CBAM declarant status application.
Companies will also need to collect the data relevant for their declaration for the financial year 2026, to be submitted via the CBAM registry by 31 May 2027. They will then need to purchase the required CBAM certificates from member state’s common central platform when established.
While these obligations all relate to the EU CBAM, companies should be aware that compliance may become more complicated as a UK CBAM is on the horizon.
The new Labour government committed to implementing a CBAM in its 2024 election manifesto. This is currently expected in 2027, although the form, shape and scope of a future UK CBAM is not yet known.
The responses are awaited to the recent consultation on a UK CBAM that closed on 13 June.
Nonetheless, the preparation efforts that importers make now for the EU CBAM will inevitably serve to facilitate any local CBAM obligations on the horizon.
The article was co-authored by Caroline Bush, Julian Wolfgramm-King, Lauren Gardner and Arthur Hopkinson.
The post How to Stay Ahead of the ‘Carbon Curve’ appeared first on ESG Investor.