CBAM: Just over a week to comply

As the deadline for the first Carbon Border Adjustment Mechanism (CBAM) report approaches on January 31st, it is crucial for undertakings engaged in importing relevant goods into the European Union to understand their obligations - which take practical effect this month. The CBAM, established by Regulation (EU) 2023/956, represents a significant step in the EU’s efforts to combat climate change and carbon leakage, aligning with the overarching goals of the European Green Deal and the Paris Agreement.

Key Practical Points on CBAM:

1. Scope of CBAM: This mechanism applies to specific goods listed in Annex I of the Regulation, primarily targeting sectors at risk of carbon leakage including iron and steel, cement, aluminium, fertilisers, hydrogen, and electricity. The goal is to ensure that these imported goods face a carbon cost equivalent to that borne by similar products under the EU Emissions Trading System (ETS).
2. Phased Implementation and Transitional Period: Recognising the complexities involved, the Regulation outlines a transitional period, during which the mechanism will be gradually implemented. This period is critical for industries to adapt and align with the new requirements. The CBAM transitional phase runs from October 1, 2023, to December 31, 2025, with no financial obligations during this period. However, there are reporting obligations.
3. Reporting Requirements: Importers of relevant goods are required to declare, on a quarterly basis, the embedded emissions during the transitional period. This first report, covering October to December 2023, is due by January 31st, 2024. However, it is useful to highlight that reporting declarants can amend their first report until July 31, 2024. However, reports must be complete to be submitted.
4. Penalties: Penalties are imposed when a reporting declarant fails to submit a CBAM report or submits an incorrect or incomplete one, ranging from EUR 10 to EUR 50 per tonne of unreported emissions, adjusted for inflation. Factors considered in determining the actual penalty include the extent of unreported information and the declarant’s behaviour and cooperation. Higher penalties apply for repeated non-compliance or failure to report for over six months.
5. Default Values for Embedded Emissions: In cases where actual emissions data is not available, the Regulation provides for default values for the first three quarters. These values, provided by the European Commission, can be used to calculate the embedded emissions in the absence of verified data.

Conclusion

The introduction of the CBAM is a landmark move by the EU in its fight against climate change. It is vital for industries involved in the import of targeted goods to be fully aware of their reporting obligations by the end of January deadline. Adhering to the deadlines prescribed by the Regulation ensures that companies remain compliant and avoid penalties. Being prepared and proactive is key to navigating this new regulatory landscape effectively.