CBAM can be explained as an EU CO2 tax mechanism to support decarbonization strategies and to fight carbon leakage. Carbon leakage occurs when carbon prices and other EU measures lead to rising costs and competitive pressure in emission-intensive sectors. As a result, production facilities are relocated to non-EU countries where there is no CO2 tax, or EU products are replaced by more emission-intensive imports from a third country. This shifts greenhouse gas emissions abroad to countries with lower climate targets and measures instead of reducing them.

The CBAM prevents these evasive tendencies. This is because when CBAM products are imported into the EU, a carbon price equivalent to the one inside the EU will have to be paid. Companies must then purchase CBAM certificates in the amount of the calculated carbon tax.

CBAM applies to covered products imported from all countries outside the EU,
unless the country

• already participates in the EU ETS – such as Iceland, Liechtenstein and Norway, which are part of the European Economic Area (“EEA”) – or
• fully links its own emission trading system to the EU ETS and adopts the same
  carbon price as paid under the EU ETS – such as Switzerland

The EU Parliament and Council have set October 1, 2023, as the commencement date for the CBAM regulation. This initiates a three-year transition phase primarily focused on reporting obligations.

In its initial phase CBAM covers 6 main product lines specified through their NACE codes. These goods have been selected based on their carbon-intensive nature and potential risk of carbon leakage. These are:

1. Iron and steel
2. Cement
3. Fertilizers
4. Aluminium
5. Electricity
6. Hydrogen

Reporting Obligations in the Transition Period

During the transition period, from 1 October 2023 until 31 December 2025 importers must know the “Product Carbon Footprint” (PCF) of the specific products they are importing. A PCF includes direct emissions (Scope 1, 2) and all downstream indirect Emissions (Scope 3) that have occurred in the value chain of the product thus far. This PCF or emission factor of the product shall be calculated based on internationally recognized standards such as the Greenhouse Gas Protocol, ISO 14064, etc.

While the calculations on the embedded emissions will be reported by the exporter, the responsibility will be placed on the EU importer to possess the PCF reports for all imports.

The deadline for the report will be one month after the end of each quarter. The first report is thus due in January 2024. During the CBAM transition period, importers are not subject to any financial obligations other than possible fines from non-compliance of holding PCF reports. Beginning December 31, 2024, importers may apply for status as an approved CBAM declarant. Once approved, the CBAM declarant will have access to their account in the European CBAM transitional registry.

CBAM reports need to include:

• the quantity of each type of good expressed in MWh or tons
• total embedded emissions covering scope 1-2-3 emissions
• any carbon price due in the country of origin for the embedded emissions in the imported goods, taking into account rebates and other forms of compensation

CBAM EU expansion until 2030

After the CBAM transitional period, the existing CBAM model will be extended to all EU ETS sectors and associated products by 2030. Thus, CBAM will also successively apply to the following sectors:

• Oil refining
• Upstream fuel combustion
• All metals
• Pulp and paper
• Glass and ceramics
• Acids and organic chemicals
• Aviation
• Marine
• Lime

Effective from January 1, 2026, importers must possess CBAM certificates equivalent to the carbon price of the embedded emissions verified by independent parties. The regulation outlines the pricing determination methodology, certificate identification, and the procedural aspects of registration. Designated as CBAM declarants, importers are obligated to establish CBAM accounts and annually submit declarations verifying and submitting the specific number of certificates. The regulatory framework includes penalties for non-compliance, including late submissions, unauthorized importations, and measures to curb circumvention practices.

Role of Net Zero Analytics (NZA)

NZA supports clients in preparing for sustainable development strategies and compliance with environmental and climate risk regulations to achieve carbon neutrality goals. Advisory services include support on ESG criteria, climate risk assessments and disclosures based on TCFD and CDP, target setting based on SBTi, and CBAM reporting requirements.