The EU's Carbon Border Adjustment Mechanism (CBAM)
What is the Carbon Border Adjustment Mechanism? What should enterprises do to comply? What's the timeline and what do importers need to report on?
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What is CBAM
The Carbon Border Adjustment Mechanism (CBAM) is an European Union (EU) policy to reduce carbon leakage by applying a carbon price on imports of certain goods. It aims to level the playing field between EU producers, who already face carbon costs, and foreign producers, who do not, thus encouraging cleaner production methods globally
Who is affected
CBAM affects importers, exporters, and manufacturers, particularly those dealing with goods like cement, iron, steel, aluminum, fertilizers, and electricity. Companies outside the EU exporting these goods to the EU will need to comply with CBAM regulations, while EU importers will face new reporting and payment obligations.
Current timeline around CBAM
CBAM is currently in a transitional phase from October 2023 to December 2025. During this period, importers are required to report emissions without any financial obligations. From January 2026, the CBAM will fully come into effect, requiring importers to purchase CBAM certificates corresponding to the emissions embedded in their imports.
Operational changes for importers
Importers must establish new processes to collect and report data on the carbon emissions embedded in their imported goods. This involves understanding the specific carbon footprint of each product, calculating emissions according to EU standards, and ensuring compliance with reporting requirements. They may also need to adjust their supply chains or negotiate with suppliers to obtain necessary emissions data.
Financial implications
CBAM will introduce new costs for importers by purchasing CBAM certificates. These costs will vary based on the carbon intensity of the imported goods and the prevailing price of EU Emissions Trading System (ETS) allowances. Importers must factor in these costs when pricing their goods for the EU market, potentially affecting their competitiveness.
What to consider as an importer
Importers should assess their current supply chains to identify products subject to CBAM. They must understand their suppliers' carbon footprints and explore options for reducing emissions or switching to lower-carbon alternatives. Additionally, they should prepare for the administrative burden of compliance, including data collection, reporting, and payment of CBAM certificates.
What is embedded emissions?
Embedded emissions are the total greenhouse gas emissions released throughout a product's lifecycle, from raw material extraction to production, transportation, and disposal. In the context of CBAM, it specifically concerns the emissions produced while manufacturing goods imported into the EU.
Emissions calculation methods
CBAM requires importers to calculate embedded emissions using specific methodologies outlined by the EU. These methods may include direct measurement, supplier data, or standardized emission factors. Accurate calculations are essential to determine the correct number of CBAM certificates to purchase.
Benefits of using a CBAM reporting solution
A CBAM-ready carbon management solution, such as Cozero’s, can significantly help companies navigate the upcoming requirements of the CBAM by addressing key challenges and positioning them for future success:
- Integrating CBAM into existing carbon reporting efforts: As CBAM reporting becomes mandatory, integrating it into your broader carbon reporting strategy makes sense. By using a solution that aligns CBAM reporting with your existing processes, you avoid the need for separate workflows, streamline data management, and maintain consistency across your entire carbon footprint.
- Handling primary data requirements effectively: From July 2024, companies are required to start using primary supplier data for emissions reporting, a common pain point given that many suppliers lack experience with the EU's emissions calculation methods. A solution like Cozero that integrates Product Carbon Footprint (PCF), Scope 3 reporting capabilities, and supplier engagement tools helps bridge this gap, enabling smoother data collection and accurate compliance.
- Focusing on cost optimization before 2026: As the CBAM transitional period progresses, the priority will shift from compliance to cost optimization. To minimize the cost of CO2 certificates starting in 2026, companies need to analyze emissions down to the supplier and country level. Cozero's capability to identify emissions hotspots allows companies to target specific areas for reduction, ultimately saving on certificate costs and improving overall carbon efficiency.
By leveraging a CBAM reporting tool that integrates seamlessly with your current carbon management efforts, companies not only ease the compliance burden but also gain valuable insights for cost savings and sustainable growth in the long term.
Frequently Asked Questions
Switching to low-carbon suppliers, decarbonizing your supply chain, and improving the energy efficiency of your imported goods can help reduce your CBAM costs. Leveraging CBAM credits from the country of origin can also provide relief.
You need detailed emissions data from the production process, including the carbon intensity of the goods you import. If actual data cannot be obtained, a record of attempts to collect it must be provided.
The CBAM transitional phase began on October 1, 2023, with full reporting requirements in place by 2026. By 2034, free carbon allowances in the EU will be phased out, and CBAM will be fully operational.
A CBAM report should include a quarterly breakdown of imported precursor quantity by CN codes, country of origin, production facility, and date of import (unlike in carbon accounting practices, the date of import is decisive, not the date of purchase). It should also contain the embedded direct and indirect emissions of the precursor, including emissions from the production processes (heating, cooling, electricity) as well as those from materials consumed in the production process. And finally, it needs to include information about any carbon price that has already been paid in the imported precursor’s country of origin.
The person who declares the importation of relevant goods inherits the CBAM reporting responsibility. This is typically the importer of goods but it can also be an indirect customs representative (e.g. when the importer is established outside of the European Union). Customs will inform importers of CBAM goods of their reporting obligations at the moment of import.
