Last month, the European Commission published its much-anticipated guidance and implementing regulations for CBAM. CBAM or the Carbon Border Adjustment Mechanism is a new compulsory scheme in Europe that seeks to level the playing field on E.U.-based companies that procure goods and commodities outside of the E.U. According to the Commission, goods and commodities manufactured outside of the E.U. do not compare with the strict carbon emissions standards that apply to E.U. manufactures, thus importers will need to purchase and surrender CBAM certificates for the embedded emissions of their imported goods. As the price for those certificates will derive from the E.U. Emission Trading System (E.U. ETS) allowance price, and since Monitoring, Reporting and Verification (MRV) rules have been designed based on the MRV system of the E.U. ETS, this will equalize the price of carbon incurred between imported goods and goods produced in installations participating in the E.U. ETS.
CBAM will be implementing in two phases. Phase one of CBAM, also known as the transitional period, takes effect on Oct. 1, 2023 (through Dec. 31, 2025) and prompts reporting and recordkeeping only. Designed as a “learning phase”, during which CBAM importers will report quarterly a set of data, including emissions embedded in their goods, without paying a financial adjustment for the embedded emissions. However, penalties may be imposed, for example for failing to submit the required quarterly CBAM reports. Phase two or definitive period starts on Jan. 1, 2026, where from 2026 to 2033, the embedded emissions for CBAM goods will be gradually covered by the CBAM obligation, as free allocation under the E.U. ETS is gradually phased out. From 2034, 100 percent of embedded emissions of the CBAM goods will be covered by CBAM certificates and no free allocation will be given under the E.U. ETS for these goods.
STEP 1: Determine if you import (into the customs territory of the E.U.) any ‘covered’ goods or commodities found in Annex 1 of Regulation (EU) 2023/956. Covered goods or commodities are listed by CN Code across 6 categories covering cement, electricity, fertilizers, iron and steel, aluminum and chemicals. Link to Annex 1 can be found at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R0956
STEP 2: Determine if you are the responsible entity or ‘reporting declarant’. The reporting declarant means any of the following persons:
(a) the importer who lodges a customs declaration for release for free circulation of goods in its own name and on its own behalf;
(b) the person, holding an authorization to lodge a customs declaration referred to in Article 182(1) of Regulation (E.U.) No 952/2013, who declares the importation of goods;
(c) the indirect customs representative, where the customs declaration is lodged by the indirect customs representative appointed in accordance with Article 18 of Regulation (E.U.) No 952/2013, when the importer is established outside the Union or where the indirect customs representative has agreed to the reporting obligations in accordance with Article 32 of Regulation (E.U.) 2023/956.
STEP 3: Retain the following information regarding goods listed in Annex I of Regulation (E.U.) 2023/956 imported during the quarter to which the CBAM report relates:
(a) the quantity of the goods imported, expressed in megawatt hours for electricity and in tons for other goods;
(b) the type of goods as identified by their CN code.
Each reporting declarant shall also retain the following information regarding the embedded emissions of the goods listed in Annex I of Regulation (E.U.) 2023/956:
(a) the country of origin of the imported goods;
(b) the installation where the goods were produced, identified by the following data:
(1) the applicable United Nations Code for Trade and Transport Location (UN/LOCODE) of the location;
(2) the company name of the installation, the address of the installation and its English transcript;
(3) geographical coordinates of the main emission source of the installation.
STEP 4: Calculate (Article 4) or estimate (Article 5) the embedded emissions pursuant to the CBAM Implementing Regulations at https://taxation-customs.ec.europa.eu/system/files/2023-08/C_2023_5512_1_EN_ACT_part1_v6.pdf
STEP 5: For each quarter from Oct. 1, 2023 until Dec. 31, 2025, the reporting declarant shall submit the CBAM reports to the CBAM Transitional Registry no later than one month after the end of that quarter. The first reporting deadline is Jan. 31, 2024 for the Q4 2023 reporting period,
In the CBAM Transitional Registry the reporting declarant shall provide the following information:
(a) the total quantity of each type of goods.
(b) the actual total embedded emissions.
(c) the total indirect emissions.
(d) the carbon price due in a country of origin for the embedded emissions in the imported goods, taking into account any rebate or other form of compensation available.
The CBAM reports shall include the information in Annex I of this Regulation.
The CBAM report, once submitted in the CBAM Transitional Registry, shall be allocated a unique Report ID.
NOTE: In order to ensure an efficient implementation of reporting obligations, the Commission has developed an electronic database, which will collect the information reported during the transitional period. The CBAM Transitional Registry is a standardized and secured electronic database containing common data elements for reporting in the transitional period, and to provide for access, case handling and confidentiality. The CBAM Transitional Registry is the basis for the development and establishment of the CBAM Registry pursuant to Article 14 of Regulation (EU) 2023/956. The CBAM Transitional Registry shall enable communication between the Commission, the competent authorities, customs authorities of the Member States and reporting declarants. The CBAM Transitional Registry will not be used for enforcement, as the information collected will solely serve to feed onto the data analysis and collection during the transitional period.