Governments and international bodies are taking steps to reduce greenhouse gas emissions, and one such initiative gaining traction is the Carbon Border Adjustment Mechanism (CBAM). Starting October 1st 2023, the CBAM has entered into effect, starting with a transitional phase set to run until the end of 2025.
In this article, we'll delve into what CBAM is, what's required to report, who is affected, and the timeline for its implementation.
What is the Carbon Border Adjustment Mechanism (CBAM)?
CBAM is a form of carbon tax on imported goods. It seeks to level the playing field by encouraging foreign manufacturers to adopt more sustainable production processes and to reduce their carbon emissions. This mechanism is part of the European Union's “Green Deal”, a set of policy initiatives approved in 2020, aimed to contribute to making the European Union carbon-neutral by 2050.
What's Required to Report?
The exact reporting requirements are still evolving, but it's expected to be a comprehensive process that necessitates transparency and accuracy in emissions data. Companies will have to demonstrate a commitment to reducing their carbon footprint and provide evidence of their efforts to mitigate emissions.
To implement CBAM effectively, Companies exporting to the EU will need to calculate and disclose the carbon footprint of their products, detailing the carbon emissions associated with the production of the goods. This includes emissions from manufacturing processes, energy consumption, and transportation.
Who Is Affected by the CBAM?
On October 1st, 2023, it began to apply to specific goods and their raw materials, prioritizing those with high carbon emissions and at the greatest risk of carbon leakage. This includes products like cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen.
While its primary focus is on imports into the EU, it has the potential to affect companies worldwide. Here's a breakdown of those likely to be affected:
a. Exporting Countries: Any nation that exports goods to the EU will need to comply with CBAM regulations. This includes both developed and developing countries.
b. Industries: industries with high carbon emissions, such as steel, cement, and chemicals, are expected to face significant CBAM-related challenges. However, the exact list of affected industries may evolve over time as the EU refines its policies.
c. Companies: companies engaged in international trade, especially those exporting carbon-intensive products, will need to adapt their business strategies to accommodate CBAM requirements.
What Is the Timeline for the Implementation of the CBAM?
- The CBAM has kicked off its transitional phase starting October 1st, 2023, by applying to specific goods and their raw materials, prioritizing those with high carbon emissions and at the greatest risk of carbon leakage.
- During the first year of implementation, companies will have three reporting options. They can choose to (a) provide full reports following the new EU methodology, (b) base their reports on equivalent systems from third countries, or (c) use reference values for reporting. However, starting from January 1, 2025, only the EU method will be accepted.
To assist importers in these reporting requirements, the Commission is developing dedicated IT tools, comprehensive guidance, training materials, and tutorials. Although importers will need to begin collecting fourth-quarter data from October 1, 2023, their first report will only be due by the end of January 2024.
- Once the permanent system becomes effective on January 1, 2026, importers will be obligated to declare annually the quantity of goods imported into the EU in the previous year and the associated greenhouse gas emissions.
- Subsequently, they will need to surrender the corresponding number of CBAM certificates, the price of which will be determined by the weekly average auction price of EU ETS allowances, measured in €/tonne of CO2 emitted.
The Carbon Border Adjustment Mechanism (CBAM) is a significant step towards promoting global environmental sustainability by addressing carbon leakage. By requiring companies to report their carbon emissions and subjecting imports to carbon pricing, the EU aims to encourage more eco-friendly production practices worldwide.
How can ESGgo software help you with the CBAM?
ESGgo software, an AI-driven ESG system, can assist with CBAM by simplifying emissions tracking, identifying risks in supply chains, ensuring compliance, and enhancing data transparency. It streamlines the process of calculating and reporting carbon emissions, helping companies meet CBAM requirements efficiently.
*Disclaimer: This summary is for general education purposes only and may be subject to change. ESGgo, Inc., and its affiliates (the “Company”, “ESGgo”, “we”, or “us”) cannot guarantee the accuracy of the statements made or conclusions reached in this summary and we expressly disclaim all representations and warranties (whether express or implied by statute or otherwise) whatsoever.