On 1 October 2023, the Carbon Border Adjustment Mechanism (CBAM) transitional scheme will enter into force. Starting on that date, producers and importers will be required to comply with applicable calculation and reporting requirements. This news item discusses the latest developments.
CBAM in a nutshell
Some time ago, an agreement was reached at the EU level on the CBAM, or Carbon Border Adjustment Mechanism. In short, it entails the introduction of a border levy on imports of emissions-intensive goods produced outside the EU. From 2026 onwards, importers will have to purchase certificates when importing goods within the scope of the CBAM (CBAM goods) into the EU. These goods include specific products in the hydrogen, cement, electricity, steel and iron, fertiliser and aluminium sectors. In our previous coverage, we have discussed the CBAM and its key elements at length. For entrepreneurs operating within the above sectors, the CBAM is a development with profound implications for matters such as pricing and import processes.
Recent CBAM developments
Although the basic set of rules – a European regulation – already entered into force on 16 May 2023, the CBAM continues to evolve. This is mainly due to the ongoing publication of additional regulations and guidelines regarding the new border levy by the European Commission. National implementing agencies such as the Dutch Emissions Authority also often provide useful information. Given this, we would like to highlight the following points:
Transitional scheme: The CBAM will only actually take effect in 2026, in phases. However, a transitional scheme applies from 1 October 2023 to 31 December 2025. In essence, this scheme means that the importation of CBAM goods from 1 October 2023 will only be linked to a reporting requirement. It will not be necessary to purchase certificates during this period.
Goods covered by the transitional scheme: The goods covered by the transitional scheme are listed in Annex I of the CBAM Regulation. The scope is determined based on the Combined Nomenclature (CN) codes of the goods concerned.
Reporting until 2026: The reporting requirement under the transitional scheme involves the importer having to submit a digital report through the European Commission’s designated portal within one month after the end of each quarter. Among other things, this report should include the following information:
The quantity of CBAM goods by category;
The total actual realised ‘embedded’ emissions from those goods;
The total ‘indirect’ emissions (such as emissions released in producing the electricity used during manufacturing processes);
Any emission allowances/prices already paid in the country of origin.
Initial reporting: The first report covers the period (quarter) from October 2023 to December 2023 and must be submitted no later than 31 January 2024 through the CBAM Transitional Registry. This is an online database/portal of the European Commission that will be online from 1 October 2023.
Calculation of emission values: A critical component of the reporting requirements (and also for the purchase of certificates from 2026) is the calculation of emission values relating to the goods imported by the importer. The starting point is to determine the actual emissions involved. The importer usually depends on the EU or non-EU producer of the goods (the ‘operator’) to provide this information. This operator is required to track direct and indirect emissions, as well as the ‘embedded’ emissions from specific materials consumed during the production process (the ‘precursors’). The calculations (or measurements) are subject to extremely detailed rules.
Inward processing: Goods may be imported to be processed or enriched in the EU without being subject to customs duty (inward processing). In such cases, the reporting requirements do not in principle apply, provided the goods are exported again after processing or enrichment.
Actual CBAM as of 2026: The transitional scheme ends on 31 December 2025. Starting in 2026, the actual CBAM will enter into effect in phases. One important change is that the importer will then no longer be the point of contact, and will be replaced by the ‘CBAM declarant’. This state-authorised legal person must meet specific reliability requirements. Only the CBAM declarant will be authorised to bring CBAM goods into the EU. They will also have to purchase the necessary emissions certificates. Businesses wishing to import CBAM goods from 2026 onward will either have to apply for authorisation themselves or use the services of an external CBAM declarant.
Our advice: make sure you are thoroughly prepared!
Many entrepreneurs have questions about the CBAM and the transition scheme. The introduction of an entirely new levying instrument is always accompanied by questions and concerns. We therefore expect that the authorities will be relatively accommodating and cooperative during the transitional phase. Nonetheless, they will still have the authority to impose sanctions if an operator fails to comply with the applicable regulations. We recommend that entrepreneurs prepare their organisations as thoroughly as possible for the start of the CBAM. The calculation of emission values in particular is a complex exercise, especially given the fact that the importer will mainly depend on operator, who may be situated outside of the EU, for this. Intensive and diligent contact with producers of CBAM goods is crucial in this regard.
Should you have any questions as a result of this article or wish to discuss matters further, please contact Marisa Hut or Stevie Mols at VAT & Customs Advisory. They would be happy to talk you through the potential impact of the CBAM on your business, and can help you to identify your obligations and properly prepare for the reports and calculations. If you would like to learn more about sustainability and ESG, Lucy Lau at ESG Advisory can provide you with all the information you need.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.