CBAM report explained simply: Detailed insights into the Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (CBAM) is an innovative instrument of the European Union aimed at strengthening climate protection and promoting fair trade. Introduced on October 1, 2023, CBAM requires importers of certain goods into the EU to purchase certificates for the CO2 emissions generated during their production. This mechanism is intended to ensure a level playing field for EU producers compared to those from countries that may have less stringent emission regulations.

To achieve the goals of the "Fit for 55" package – a reduction of EU CO2 emissions by 55 percent by 2030 compared to 1990 – CBAM particularly targets sectors known for their high emissions. Importers must now comply with regulations and methods for identifying and reporting the embedded CO2 emissions in their products. A transition phase until 2025 serves to gradually introduce the new requirements and ensure a smooth implementation for companies.

CBAM Report: Key Findings at a Glance

• CBAM requires importers to purchase emission certificates.

• It aims for fair competition and compliance with climate goals.

• A transition phase facilitates adaptation to the new rules.

The Basics of the CBAM Report

The Carbon Border Adjustment Mechanism (CBAM) is a climate policy instrument of the European Union (EU) designed to effectively combat climate change. CBAM aims to create equality in international trade regarding carbon prices and reduce the risk of carbon leakage.

Carbon leakage refers to the phenomenon where companies relocate production sites to countries with less stringent emission regulations to save costs. This undermines the EU's climate protection efforts and increases global greenhouse gas emissions.

To counteract this, CBAM is applied:

• Timeline: Starting from October 1, 2023, CBAM will be gradually implemented.

• Goods Categories: It affects specific carbon-intensive goods such as cement, aluminum, and steel.

• How it Works: Importers of these goods must buy certificates reflecting the CO2 price that EU producers must pay.

• Transparency: Companies must regularly report on the imported goods and the corresponding carbon footprint.

CBAM is an important tool to achieve the goals of the European Green Deal and send a clear signal regarding the seriousness of the EU in combating climate change. It creates an incentive for non-EU producers to invest in low-emission technologies if they wish to compete in the EU market.

The mechanism reflects the EU's efforts to create a fair and stable market that considers climate protection and supports global efforts to reduce greenhouse gas emissions.

Tips and Template for Creating a CBAM Report

Goals and Background of CBAM

The use of the Carbon Border Adjustment Mechanism (CBAM) primarily aims to create competition equality and support EU climate goals. It is intended to ensure that the import costs of carbon-intensive goods reflect the same climate protection requirements as those for goods produced within the EU.

Avoiding Carbon Leakage

Carbon leakage describes the phenomenon where companies relocate their production to countries with less strict environmental regulations to circumvent higher costs imposed by stringent climate protection regulations. This results in a shift of emissions rather than their reduction. The CBAM aims to prevent this undesirable effect by requiring importers of certain products to pay a CO2 price for emissions generated during production outside the EU. This is intended to minimize the risk of carbon leakage, thus achieving parity with EU-based manufacturers and maintaining the integrity of environmental protection measures.

Supporting EU Emissions Trading Systems

CBAM complements the existing EU Emissions Trading System (ETS) by ensuring that companies outside the EU bear similar costs for CO2 emissions as those within the EU. This adjustment system can help enhance the climate policy effectiveness of the ETS, as it creates incentives for companies outside the EU to invest in a low-carbon economy. By integrating CBAM into the EU's climate target agenda, particularly the "Fit for 55" package, which aims for a reduction of net greenhouse gas emissions by at least 55 percent by 2030, the necessity for consistent reductions in greenhouse gas emissions is emphasized and positions the EU as a pioneer in global climate protection.

How CBAM Works

The core principle of the Carbon Border Adjustment Mechanism (CBAM) is that importers must acquire certificates for emissions that arise during the production of imported goods. This is designed to ensure that the European Union's climate policy is effectively implemented and prevents companies from relocating their production to countries with less stringent climate regulations.

Emissions Trading and CBAM Certificates

Importers must acquire CBAM certificates corresponding to the emissions that occur during the production of imported goods outside the EU. These certificates are purchased at a price linked to the prices of the EU Emissions Trading System (EU-ETS). Direct emissions from production and indirect emissions related to the generated electricity are taken into account.

Assessment and Methodology

The assessment of emissions is conducted through a defined methodology designed to reflect the true emission effort of the produced goods. If no specific emission data is available, Default Reference Values are applied. These standard reference values serve as estimates for the average emissions of the respective product group.

Monitoring and Reporting

The monitoring and reporting of emissions are essential components of CBAM. Importers are required by Regulation (EU) 2023/956 to keep accurate records of the indirect and direct emissions of their imported goods and report these to the authorities. Compliance with the regulations is monitored, and non-compliant companies may face sanctions.

Overview: Sectors and Goods Affected by CBAM

The implementation of the Carbon Border Adjustment Mechanism (CBAM) primarily affects energy-intensive industries. This regulation aims to prevent carbon leakage by taxing direct and indirect emissions embedded in imported goods.

Iron and Steel

Iron and steel producers are affected by CBAM due to the energy-intensive manufacturing process. Importers of these materials must expect additional costs since the greenhouse gas emissions arising during production are taxed. This applies to both direct emissions incurred during production and indirect emissions from required electricity.

Cement

In the cement sector, which is responsible for producing the binding agent for concrete, significant greenhouse gas emissions occur. Therefore, imported cement and related products fall under CBAM, which can result in higher costs for importers if emissions are not compensated within EU borders.

Aluminum and Fertilizers

Aluminum and fertilizers are also addressed by CBAM. The energy intensity of their production processes and the corresponding emissions mean that importers of these goods need to adapt to CBAM regulations. They must demonstrate greenhouse gas emissions and pay corresponding levies linked to the emissions of their products.

Electricity and Hydrogen

Electricity and hydrogen are included in CBAM as they often serve as energy carriers for industrial production. If these energy carriers are imported and associated with high emissions, they are captured by CBAM provisions. For industries reliant on imported energy, this means increased scrutiny of the emissions balance of their supply chains.

International Dimension and Impacts of CBAM

The implementation of the Carbon Border Adjustment Mechanism (CBAM) by the European Union has significant impacts at a global level, particularly regarding international trade relations, global emission levels, and the economic development of third and developing countries.

Global Emission Impacts

CBAM aims to promote global emission reductions by encouraging importers to adhere to EU environmental standards. This creates an incentive for non-EU countries to raise their own carbon prices to avoid being disadvantaged. The European Commission intends for CBAM to motivate international trade partners to undertake similar climate protection measures to support the Paris Agreement and effectively reduce global emissions.

Adjustment of International Trade Relations

CBAM is expected to modify international trade relations by imposing a price at the border for CO2-intensive products that reflects the internal EU price for CO2 emissions. This results in both EU companies and international economic actors needing to adapt to new trade measures mandated by the EU. The World Trade Organization (WTO) must ensure that CBAM complies with international trade rules, particularly regarding non-discrimination and national treatment.

Impacts on Developing and Third Countries

Developing countries and third countries may be differently affected by CBAM. On one hand, CBAM could exert pressure on these countries to raise their own environmental and climate protection standards. On the other hand, particularly developing countries with limited resources may struggle to make the necessary adjustments. To ensure these countries are not disadvantaged, the European Commission is discussing possible support measures to promote a fair transition and shape trade relations in terms of fairness and sustainability.

Implementation and Rollout of CBAM in the EU

The implementation of the Carbon Border Adjustment Mechanism (CBAM) in the EU represents a crucial step within the European Green Deal framework and aims to ensure fairness in international trade while effectively reducing greenhouse gas emissions (GHG). This system reflects the intent to protect EU industries from competitive disadvantages while ensuring compliance with EU ETS (Emissions Trading System) requirements.

Legislation and European Bodies

In the context of CBAM's introduction, specific legislations have been adopted, developed by the European Parliament and the relevant bodies as part of the regulatory framework. Regulation (EU) 2023/956 serves as the legislative basis for CBAM, which has been in a transition phase since October 1, 2023. This phase is aimed at preparing companies for full implementation and the associated reporting obligations, with the first reporting period for EU importers ending on January 31, 2024.

Involvement of Businesses and Trade Partners

Economic actors, particularly EU importers, are significantly involved in the implementation of CBAM. They must adapt to the new requirements to accurately report imports of carbon-intensive goods from third countries. Here, the relevance of the European Economic Area (EEA) must be noted, as trade partners and their industries are regulated concerning CBAM to ensure fair competition. The gradual taxation of certain carbon-intensive goods starting in 2026 is expected to contribute to equity and strengthen climate protection.

Transition Phase and Future Perspectives

The transition phase of the Carbon Border Adjustment Mechanism (CBAM) began on October 1, 2023, and aims for a progressive implementation by January 1, 2026. During this phase, companies face extensive reporting obligations. The first CBAM report must be submitted by the end of January 2024.

During the transition phase, affected companies will receive free certificates, known as free allowances. This adjustment phase is aimed at gradually introducing companies to the new system while ensuring that the primary goal of CBAM – preventing carbon leakage – is not compromised. Carbon leakage refers to the relocation of CO₂-emission-intensive production to countries with lower environmental regulations.

The CBAM is part of the "Fit for 55" package of the EU, which aims to reduce greenhouse gas emissions by 55% by 2030 compared to 1990, thus accelerating decarbonization and development towards a low-carbon economy.

Starting from January 1, 2026, the transition phase will end. At that point, CBAM will come into full effect, and free allocations will be gradually reduced. CBAM is expected to help companies adjust to the costs of external CO2 prices and create an incentive for the decarbonization of the European industry.

Requirements and Obligations for Importers

For importers in the EU subject to the regulations of the Carbon Border Adjustment Mechanism (CBAM), there is an obligation to comply with clearly defined guidelines. Here, the consistent adherence to these regulations is as important as the transparent reporting of the CO2 emissions emitted during trade.

Compliance and Penalties under CBAM

Importers are required to comply with the CBAM regulations and closely monitor CO2 emissions arising from imported goods. Failure to comply with these provisions may result in penalties.

• Establishment of a Compliance System: Importers must implement mechanisms to ensure that the reported emission quantities are accurate.

• Payment of a CO2 Fee: A fee must be paid for emissions that do not meet EU standards, compensating for the difference to the EU CO2 price.

Transparent Reporting

A crucial requirement for EU importers and registrants is the establishment of a clear reporting structure. This must encompass all transactions and detail the emissions associated with the imported products.

• Quarterly Reports: Importers must submit quarterly reports on the CO2 emissions of their imported goods.

• Documentation: Documentation and transparent communication of calculated emission values to the relevant EU authorities is essential.

Meticulous adherence to these requirements ensures that the EU can achieve its climate protection goals while maintaining fair competition for EU companies.

Frequently Asked Questions

This section answers common questions about the Carbon Border Adjustment Mechanism (CBAM). The goal is to create a clear understanding of this instrument introduced by the European Union to combat climate change.

What exactly is the Carbon Border Adjustment Mechanism?

The Carbon Border Adjustment Mechanism is a regulatory instrument of the EU aimed at preventing the relocation of CO2 emissions. This system seeks to ensure fair competition conditions for domestic and imported products by imposing a compensatory charge at the border on carbon-intensive products.

How does the CBAM regulation work in practice?

In practice, importers are required to purchase certificates that represent the carbon content of the imported goods. This measure is intended to make the import of products manufactured in countries with lower environmental protection standards less attractive, thereby creating an incentive for cleaner production worldwide.

Which products are affected by the Carbon Border Adjustment Mechanism?

The CBAM primarily affects carbon-intensive products such as cement, fertilizers, iron, steel, and electricity. The specific products that fall under this regulation may adjust over time to maintain or improve the effectiveness of the mechanism.

Who must comply with the CBAM requirements and how does it affect them?

The CBAM requirements must be met by importers of relevant products into the European Union. For these companies, this means additional costs for purchasing the necessary CO2 certificates that should correspond to the emission costs of the EU.

How is the CBAM calculation performed?

The CBAM calculation is performed by multiplying the carbon content of the imported product by a specific CO2 price. This price is set in reference to prices in the EU Emissions Trading System and reflects the costs of CO2 emissions.

What does the reporting obligation entail under CBAM?

The reporting obligation requires affected companies to submit regular reports on the imported products and their corresponding CO2 emissions. The goal is to create transparency and ensure compliance with CBAM regulations.

*For the sake of simplicity, we use the term CO2 here. However, we understand it more broadly as "CO2 equivalents" or CO2e. CO2e is a metric used to account for the climate impacts of all greenhouse gases by converting their emissions into an equivalent amount of carbon dioxide. This is based on measuring their global warming potential. In discussions about CO2 reduction in companies, it is generally better to use CO2e. Because it provides a more comprehensive picture of a company's total emissions. By considering not only carbon dioxide but also other significant greenhouse gases such as methane and nitrous oxide.

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