How to Prepare for Carbon Border Adjustment Mechanism (CBAM)
The Paris Agreement, an international treaty on climate change, aims to limit global warming to well below 2°C, ideally 1.5°C, compared to pre-industrial levels. Adopted in 2015, it entered into force in 2016.
Following the agreement's lead, the European Union established "The European Green Deal" in 2019, aiming for a significant reduction in greenhouse gas emissions. To achieve this, they introduced the "Fit for 55" legislative package, which includes the Carbon Border Adjustment Mechanism (CBAM). This recently published regulation creates a system to monitor and tax carbon emissions linked to imported goods, aiming to reduce Europe's overall carbon footprint. The implementation of CBAM is divided into two phases, with the first transitional phase being in effect from October 2023 to December 2025.
Phase one requires that importers start collecting data for quarterly CBAM reporting on their imported products with embedded emissions. Any importer of record importing cement, fertilizers, iron, steel, aluminum, electricity, and hydrogen is obligated to report the amount of embedded greenhouse gasses, directly and indirectly, in their product.
When phase two of the regulation goes into effect in January 2026, importers will be required to begin paying a tax based on the amount of emissions emitted for the manufacturing of their products outside of the European Union. Phase two of the regulation will initially apply to a subset of products with these embedded emissions and will slowly expand to encompass all tariff headings by 2034.
Grow your international trade knowledge. Check out our other article: