Implementing the EU CBAM

In December 2022, the EU reached agreement on the introduction of a carbon border adjustment mechanism (CBAM). The CBAM is to commence from October 2023, but with an initial period of reporting only. The European Commission has now published a consultation on the draft implementing regulations for the initial CBAM reporting period. The consultation is open for responses until 11 July 2023

It is important that any importers likely to be affected by the CBAM regulations should carefully consider their obligations. Whilst it is hoped that the Commission will provide further guidance around an importer’s obligations, it may be that importers should already be liaising with third country suppliers of those goods covered by CBAM with a view to ensuring that the necessary information is available for reporting from January 2024.

Background

In December 2022, the EU reached agreement on the introduction of a carbon border adjustment mechanism (CBAM) to prevent carbon leakage on the importation of items such as iron, steel, cement, fertiliser, aluminium, electricity and hydrogen. The CBAM is to commence from October 2023, but with an initial period of reporting only. The scheme will involve importers being required to buy CBAM certificates to compensate for carbon emissions in the country of production.

Full implementation is due to be phased in between 2026 and 2034. During an initial period commending from October 2023, importers are required to make CBAM reports instead.

The CBAM regulation (Regulation (EU) 2023/965) officially entered into force the day following its publication in the Official Journal of the EU on 16 May 2023.

CBAM regulation

The Regulation will apply to “importers” of “goods” into the EU (Article 3). Goods are defined as those within Annex I to the Regulation. An importer is “either the person lodging a customs declaration for release for free circulation of goods in its own name and on its own behalf or, where the customs declaration is lodged by an indirect customs representative in accordance with Article 18 of Regulation (EU) No 952/2013, the person on whose behalf such a declaration is lodged”.

The goods covered by the Regulation are set out in Annex I. In overview, it covers: Iron and steel; Cement; Fertilizers; Aluminium; Electricity; and Hydrogen. The Annex contains a long list of items described reference to the Common Nomenclature of Goods including their customs description.

The system will require an importer to register as an authorised CBAM declarant (Article 5). Only an authorised CBAM declarant will be able to import “goods” into the EU (Article 4).

There will be some exceptions eg for small consignments in personal luggage and other consignments with a value below that specified for
goods of negligible value in Article 23 of Council Regulation (EC) No 1186/2009 (€150 per consignment) (Article 2).

There are penalty provisions in Article 26, for example, for importation by a person not an authorised CBAM declarant or where an authorised CBAM declarant fails to surrender certificates to cover their importations.

Initial CBAM reporting obligation and content requirements

The period of initial reporting commences from October 2023 during the transitional period before the purchase of CBAM certificates is necessary (Article 35). During the initial period, importers will be required to make CBAM reports on a quarterly basis, no later than one month after the end of each quarter. Accordingly, the first report will be required to be made by end January 2024. CBAM reports must include a range of information including (a) the quantity of goods imported; (b) the actual total embedded emissions; (c) the total indirect emissions; (d) the carbon price due in a country of origin for the embedded emissions in the imported goods.

Article 32 makes it clear that during the transitional period, the obligation of importers is limited to reporting. That reporting obligation will either be on the importer or, where they use an indirect customs representative which agrees, on that representative. Article 33 contains an obligation on local customs authorities to inform importers of their duties under the CBAM: “The customs authorities shall inform the customs declarant of the reporting obligation referred to in Article 35, at the latest at the moment of the release of goods for free circulation”.

The main CBAM regulations make reference to implementing regulations, in particular in relation to the calculation of indirect emissions. Article 35(6) empowers the Commission to make implementing regulations “concerning the information to be reported, the means and format for the reporting including detailed information per country of origin and type of goods”. The implementing regulations may also include “detailed rules regarding the elements of the calculation methods” for emissions and “on the means and format for the reporting requirements for
indirect emissions in imported goods”. As such, the implementing regulations are a fundamental aspect of the reporting process.

Emission calculation methodology

The emissions calculation methodology is dealt with by Article 7 and Annex III. This involves a highly complex procedure requiring a number of detailed calculations and will depend on whether the goods are simple or complex. "Simple goods" are defined as goods produced in a production process requiring exclusively input materials and fuels having zero embedded emissions and "complex goods" encompass all other goods. For complex goods, the calculation of emissions will need to take into account the embedded emissions of the input materials (precursors) consumed in the production process.

Again, the regulation assumes that the Commission will adopt implementing acts which will provide additional detail on the calculation method for both direct and indirect emissions. Article 7(2) states that, “When actual emissions cannot be adequately determined, as well as in the case of indirect emissions, the embedded emissions shall be determined by reference to default values in accordance with the methods set out in Annex III, point 4”. There is an expectation that the Commission will provide these default values and Article 5 of the implementing regulations provides that, “Default values for the transitional period made available and published by the Commission may be used for input materials or subprocesses contributing to less than 20% of the total emissions of the good, where the reporting declarant reports actual emissions for complex goods.”

Importers will clearly need to liaise with their non-EU suppliers and let them know that emission data will be required for reporting purposes as from October 2023. The draft implementing regulations allows only a short and temporary derogation from the requirement to provide accurate data. Article 4(3) of the implementing regulation states that, “…until 31 July 2024 for each import of goods for which the reporting declarant does not have all the information listed in Article 3(2), the reporting declarant may use other methods for determining the direct emissions. In such case the reporting declarant shall indicate and reference in its CBAM report the methodology followed to establish such values”.

Given the complexity around these calculations, it will clearly be necessary for the Commission to publish further guidance on how importers need to approach this area.

Comment

The CBAM implementing regulations are open for comments for a four week period ending on 11 July 2023 and feedback can be provided via the Commission website.