10 Frequently Asked Questions on the EU Carbon Border Adjustment Mechanism (CBAM)
The EU's Carbon Border Adjustment Mechanism (CBAM) is a groundbreaking policy aimed at tackling carbon leakage and leveling the playing field for EU producers facing strict carbon regulations. As CBAM reporting obligations commence from October 2023, stakeholders have numerous questions about its implementation and impact. Here are the top 10 frequently asked questions about CBAM:
1. What is the Carbon Border Adjustment Mechanism (CBAM)?
CBAM is a regulatory tool designed to prevent carbon leakage by imposing a carbon price on imports of certain goods into the EU. This ensures that EU producers, who must adhere to strict carbon regulations under the EU Emissions Trading System (EU ETS), are not at a competitive disadvantage compared to foreign producers not subject to similar carbon costs.
2. When does CBAM reporting begin?
CBAM reporting obligations commence on October 1, 2023. However, the full implementation, including the requirement to purchase CBAM certificates, will start on January 1, 2026.
3. Who is responsible for CBAM compliance?
The responsibility for CBAM compliance falls on the importer who lodges the customs declaration for the free circulation of goods in the EU. If an importer uses a customs broker, the broker can act as an indirect representative and handle the CBAM reporting obligations.
4. What goods are covered under CBAM?
Initially, CBAM covers goods such as cement, iron and steel, aluminum, fertilizers, and electricity. The list of covered goods is expected to expand over time as the EU phases out free allowances under the EU ETS.
5. How do I calculate the embedded emissions of my goods?
During the transitional period, importers can use three methods to calculate embedded emissions:
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6. What if my supplier does not provide the required emissions data?
If a supplier does not provide the necessary emissions data, importers may initially use default values. However, over time, importers are expected to obtain precise data from their suppliers. It is advisable to include clauses in contracts with suppliers that mandate the provision of emissions data.
7. Will there be any additional payments when importing goods?
No additional payments are required during the transitional period (2023-2025). Starting January 1, 2026, importers will need to purchase CBAM certificates, priced based on the average weekly price of EU ETS allowances.
8. How will CBAM affect my business financially?
CBAM could significantly impact businesses financially, especially those with low profit margins. The costs associated with purchasing CBAM certificates, compliance, and potential working capital requirements for pre-financing certificates need to be considered.
9. What happens if I fail to comply with CBAM reporting requirements?
Non-compliance with CBAM reporting requirements can result in penalties. The transitional period is intended as a learning phase, so penalties may be less severe initially. However, businesses should use this period to set up robust compliance processes to avoid future penalties.
10. How should my business prepare for CBAM?
Businesses should start by identifying whether their goods are covered under CBAM and who within their organization is responsible for compliance. They should engage with suppliers to obtain emissions data, review and update contracts to include necessary clauses for data provision, and set up internal processes for reporting. Utilizing the transitional period to gather data, set up systems, and liaise with the EU Commission on any uncertainties is crucial.
CBAM represents a significant step towards creating a fair and level playing field for EU producers while addressing global carbon emissions. Businesses must stay informed and proactive to ensure compliance and minimize financial impacts. For more detailed guidance, consulting with experts and attending industry-specific seminars hosted by organizations like PwC can provide valuable insights and support.