CBAM: What you need to know

Fact #1: the definition of the Carbon Border Adjustment Mechanism (CBAM)

The EU launched its Carbon Border Adjustment Mechanism (CBAM) as part of its efforts to tackle climate change and define a level playing field for European businesses in the face of varying carbon pricing policies across the world.

Fact #2: What is the aim of the Carbon Border Adjustment Mechanism (CBAM)

The CBAM is essentially a measure designed to prevent carbon leakage. Carbon leakage occurs when companies move their production to regions with less stringent climate policies to avoid higher costs associated with carbon emissions in their home country. The EU aims to prevent this by imposing a carbon price on certain imports based on the carbon footprint of the imported goods.

Fact #3: What are the main features of the CBAM?

Carbon Pricing for Imports: The mechanism proposes that certain imported goods would be subject to a carbon price, reflecting the amount of greenhouse gas emissions generated during their production. This is meant to ensure that imported products face a carbon cost similar to that of products produced within the EU.
Phased Implementation: The CBAM is expected to be implemented in phases to allow for a gradual adjustment. Initially, a selected number of sectors (cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen) and products might be included, and over time, more sectors could be incorporated.

Link to EU Emissions Trading System (EU ETS): The CBAM is likely to be closely linked to the EU ETS, the carbon pricing system in place within the EU. The carbon price for imports could be tied to the average carbon price within the EU ETS.
Border Adjustment Mechanism for Free Allocation: To prevent double carbon pricing (both in the exporting country and the EU), the mechanism includes provisions for free allocation or rebates for companies in the exporting country that can demonstrate that they are subject to an equivalent carbon pricing mechanism.

Fact #4: What are the deadlines for the Carbon Border Adjustment Mechanism?

1^st October 2023: the CBAM entered into application in its transitional phase

31^st January 2024: importers have to start reporting the greenhouse gas emissions (GHG) embedded in their imports in the selected sectors (direct and indirect emissions), but without making any payments or adjustments at this stage.

Until end of 2024: companies can report in three different ways: 1/ full reporting according to the EU methodology described in the Implementing Regulation (available here), 2/ reporting based on an equivalent method, 3/ reporting based on default relevance values (only until July 2024).

1^st January 2025: importers can only use the EU method for reporting

1^st January 2026: the permanent CBAM system comes into force, importers will need to declare each year the quantity of goods imported into the EU the previous year, and their associated GHG.

Fact #5: What impact will the Carbon Border Adjustment Mechanism have on British companies?

At this stage, the priority for British companies should be to focus on CBAM reporting requirements, to ensure they fully comply with EU regulations, and avoid potential administrative hurdles or even goods being blocked at the border at a later stage.