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What is CBAM?
CBAM has been introduced starting gradually in October 2023 in order to slowly familiarise participating companies inside and outside the EU with the reporting obligations and methods for determining embedded emissions in accordance with the requirements of the EU Emissions Trading Scheme. Initially, the instrument only applies to electricity, cement, iron and steel, aluminium, fertilisers and hydrogen. The processes used to manufacture these products are accompanied by particularly high CO2 emissions and therefore exposed to a high risk of carbon leakage (CL).
CBAM’s principle is that the same CO2 price applies to imported and EU-manufactured products. The problem is that European emissions trading has made the production of high emission goods in Germany and the EU more expensive. If industrial raw materials and goods from other countries are now also subject to a CO2 price in the EU, this protects against competitive disadvantages and ‘carbon leakage’ (emission increase due to the relocation of industrial production abroad, where little or no CO2 pricing is applied to the manufactured goods). The prior practice of granting industrial companies a free allocation of emission allowances to guard against direct carbon leakage through the EU ETS is then no longer necessary. This allows the CO2 price in the EU to operate with greater effectiveness. In addition, carbon price for imports also creates financial incentives for companies in third countries to protect the climate. CBAM therefore combines carbon leakage protection and effective CO2 pricing. The EU's aim is to promote effective methods of decarbonisation worldwide.
Timeline
The EU CBAM Regulation (2023/956) came into force in May 2023 initiating a two-year transition phase that started on 01/10/2023. During this period, participating companies, i.e. importers of industrial raw materials and goods, must submit quarterly reports detailing the emissions associated with these products. No financial obligations arise during the transition phase.
From the regular phase, which begins on 01/01/2026, importers of CBAM goods must be authorised as CBAM declarants. In addition, CBAM certificates must be acquired and surrendered for the emissions associated with the imported goods.
CBAM will be gradually expanded from 2026 to 2034. At the same time, free allocation in the EU ETS will be phased out for these industries.
Publications
Explanatory film by EU Tax and Customs: "Carbon Border Adjustment Mechanism in 60 seconds"