Carbon Border Adjustment Mechanism (CBAM) is in force. What needs to be considered?

The European Union has started on 01 October 2023 with the gradual introduction of the so-called CO₂ border adjustment system (Carbon Border Adjustment Mechanism – short CBAM) according to the regulation (EU) 2023/956 (in the following called CBAM-Regulation) [1]. The CBAM-Regulation is intended to counteract global competitive disadvantages of intra-European companies with high CO₂ certificate costs by imposing a comparable CO₂ price on imports from non-European competitors [1][2]. In this way, companies in CO₂-intensive industries should be prevented from relocating their production to countries outside Europe. The CBAM regulation is a new instrument of the EU Commission’s “Fit for 55” package [3] and is in line with the plans of the German government’s coalition agreement for 2021 to 2025 [4].

In diesem Artikel wird auf folgende Fragen eingegangen:

• Why was CBAM introduced?
• How do CBAM and EU-ETS differ?
• What are the potential effects of the CBAM?
• For which goods does the CBAM apply?
• How does the stepwise implementation of the CBAM work?
• How are gray emissions calculated?
• What administrative and legal challenges are associated with the CBAM?
• What important dates and deadlines need to be considered?

Why was the CBAM introduced?

So far, there is no global CO₂ pricing. To achieve the climate targets within the European Union, the European Emissions Trading Scheme (EU-ETS) was established in 2005 as a central climate protection instrument [5]. Under this scheme, the companies concerned must compensate for their emissions by purchasing European greenhouse gas emission allowances (EU-ETS certificates). One EU-ETS certificate covers the price for one ton of emitted CO₂ equivalents. For European companies in CO₂-intensive industries, this CO₂ pricing results in a competitive disadvantage compared to companies in the same industry outside the EU, which do not have to pay comparable CO₂ levies.

To compensate for this unequal conditions of competition for European companies and to prevent carbon leakage to third countries, the allocation of free EU-ETS certificates to CO₂-intensive companies was introduced. However, a special report by the European Council of Auditors [6], suggests that this measure is inhibiting the shift to climate-friendly production facilities.

A change in strategy is therefore now taking place within the entire European economic area and the free allocation of EU-ETS certificates to European companies is being progressively reduced [7]. Complementary, from 2026 on, CBAM allowances have to be purchased for non-balanced greenhouse gas emissions of certain imported goods. This measure mimics a global carbon price for European companies. The risk of outward migration as well as the competitive disadvantage in relation to international competitors of companies in CO₂-intensive industries in the EU is to be mitigated in this way. In addition, a stronger incentive for more environmentally friendly production methods in the EU and in third countries is to be created in order to promote global climate protection.

How do CBAM and EU-ETS differ?

Both CBAM and EU-ETS are instruments of the European Union for the reduction of greenhouse gas emissions. The EU-ETS, which has been in place since 2005, applies to certain manufacturing processes and activities within the EU. The overarching goal is to drive decarbonization while preventing carbon leakage within the EU. However, this instrument cannot prevent the shift of CO₂ emissions beyond the EU borders to third countries. This is where the CBAM for the import of certain goods into the EU customs territory will gradually come into play from October 2023. When the CBAM is fully implemented in 2026, the two instruments will have a comparable structure and will be linked via the pricing of the EU ETS certificates.

A report to be submitted for both regulations, which shows the gray emissions to be taken into account, forms the basis for calculating the allowances to be purchased. The price of the EU-ETS certificates is determined by means of auctions, which are intended to provide price incentives for reducing greenhouse gas emissions by means of tightly set certificate quotas. The price of the CBAM allowances is linked to the average calendar week price of the EU-ETS certificates and thus replicates the developments on the European market without additionally using mechanisms for greenhouse gas restriction or import restriction, see Figure 1. Accordingly, the trade flows are not additionally restricted.

While the EU-ETS certificates have to be purchased by the producers, the CBAM certificates are purchased by the importers of the CBAM goods into the customs territory of the Union. These importers must ensure that they have acquired at least 80% of the required CBAM allowances by the end of the quarter. At the end of the year, a request can be made to buy back surplus CBAM certificates via the CBAM register. If this does not happen, the CBAM certificates will be cancelled on July 1 of each year. This is to avoid that, over time, the prices of CBAM allowances are decoupled from the prices of EU-ETS certificates through unrestricted trading between importers.  Since these instruments have a complementary effect, it is intended that amendments to one regulation will take the other into account as far as possible.

What are the potential effects of the CBAM?

Due to the product groups taken into account, the CBAM regulation affects a large part of the manufacturing industry and can also become relevant for private individuals. Accordingly, this results in an instrument with great influence potential. The reduction of free EU-ETS certificates and the obligation to purchase CBAM certificates from 2026 onwards will result in higher costs for the production and import of certain goods within the EU. Therefore, higher end-user prices are to be expected within the EU. Furthermore, third countries that do not yet use CO₂ pricing could be encouraged to establish such a system or to join the EU-ETS.

The revenues generated by CO₂ pricing of imports could be used to relieve the burden on particularly affected consumers or to make further climate protection investments. This could be similar to the innovation fund introduced via the EU-ETS Directive to support the decarbonization of European industry. Depending on how the EU Commission decides in this regard, this could influence the international acceptance and perception of the CBAM as a climate protection instrument.

In the preparation of the CBAM regulation, a refund of the CO₂ taxes paid for European companies exporting to countries that have no or a lower CO₂ price was discussed [8]. In 2022, the European Parliament called for such export compensation when voting on the EU-ETS and CBAM regulations [9]. The current version of the CBAM regulation does not yet address this issue. However, an evaluation of the effects of CBAM is to be carried out by the EU Commission by the end of 2024 and further regulations derived if a competitive disadvantage for export-oriented companies is identified [10].

For which goods does the CBAM apply?

Whether an imported good is subject to the CBAM depends on whether the related customs tariff number according to the Combined Nomenclature (CN) is listed in Annex I of the CBAM Regulation. Goods from inward processing treatments may also be subject to the CBAM regulation.

For now, CBAM is limited to certain direct greenhouse gas (GHG) emissions from selected commodity groups, which are listed in Annex I of the CBAM Regulation. These include, in both pure and processed form, cement, electricity, fertilizers, iron and steel, including certain goods made from iron or steel (e.g., pipes, structures, sumps, drums, bolts), aluminum, also including certain goods made from aluminum (e.g., pipes, structures, sumps, drums, bolts), and hydrogen, see Figure 2.

How does the stepwise implementation of the CBAM work?

The CBAM will be implemented gradually, therefore a transition period will apply between 01 October 2023 and 31 December 2025, during which adjustments to the regulatory framework, the methodology for calculating emissions and also the product groups concerned are possible. The first specification of the CBAM regulation of May 2023 took place by the publication of the first CBAM Implementing Regulation. (EU) 2023/1773 [2] in September 2023. The content of these two regulations is summarized below.

Transition period from 01 October 2023 to 31 December 2025.

In this phase, importers of CBAM goods do not yet have to acquire CBAM certificates, but must already send a quarterly CBAM report with content in accordance with Articles 33, 34 and 35 of the CBAM Regulation (EU) 2023/956 to the EU Commission via their customs declarant or their indirect representative no later than one month after the end of the quarter. The first reportable quarter began on 01.10.2023, therefore the first CBAM report must be submitted by 31.01.2024 at the latest. A CBAM report that has already been submitted can still be modified up to one month after the submission deadline in accordance with Article 9 (1) of the CBAM Implementing Regulation. Article 9(2) of the CBAM Implementing Regulation provides an exemption for the first two reports. The first two CBAM reports can still be modified until the end of the submission deadline for the third CBAM report, i.e. until 31.07.2024. An extension of the modification deadline must be requested from the competent authority within one year of the end of the quarter in question.

Table 1: CBAM reporting periods and deadlines

The procedure already requires registration in the CBAM reporting portal, provided by the EU Commission. For the past quarter, the exact quantity of the imported type of goods concerned must be reported in tons or megawatt hours (MWh). In addition, the country of origin, the production sites, as well as specifications on the production route and the specific gray emissions associated with the goods from the production process and relevant precursor materials in tons of CO₂e emissions per ton or MWh are to be named. The categories of goods to be considered as well as their production routes, system boundaries and relevant precursors are listed in Annex II of the CBAM Implementing Regulation.

Furthermore, information on any CO₂ price already paid in the country of origin must be provided, taking into account any available export refund or other form of compensation. An overview of the required information and its level of detail is provided in Annex I of the CBAM Implementing Regulation.  Since submission of the report is mandatory, sanctions are provided for in the event of a breach of the reporting obligation.

Reports are submitted via the so-called CBAM transitional register, an electronic database provided by the European Commission, and require registration via the CBAM portal for companies. In Germany, this procedure is coordinated by the German Emissions Trading Authority (DEHSt). Companies in Germany can access the CBAM portal via the customs portal. Both the DEHSt and the customs portal provide further information and assistance on their websites. The European Commission has also published a user manual for the CBAM portal.

Full implementation of CBAM as of 01 January 2026.

From this date, CBAM goods can only be imported into the customs territory of the EU by so-called authorized CBAM declarants. In addition, the core element of CBAM, the obligation to surrender CBAM certificates according to the amount of grey emissions to be offset of the imported goods, will come into force.

From 2026, importers of CBAM goods are obliged to register as so-called CBAM declarants in the CBAM register, or to be represented by approved CBAM declarants. The EU Commission will provide appropriate processes and documentation for this purpose. Nationally mandated authorities will monitor compliance with this process.

Furthermore, CBAM declarants are obliged to submit annual CBAM reports. These reports must include information on the exact quantity of imported CBAM goods in metric tons or MWh for the previous calendar year. The associated gray emissions must be calculated according to the specifications of the CBAM Regulation and the information must be verified by an accredited testing body. The CO₂ prices actually paid in the country of origin and the EU-ETS certificates issued free of charge in the EU can be deducted from the total amount of calculated grey emissions, see Figure 3. CBAM certificates must be purchased and surrendered for the remaining grey emissions that have not yet been offset. The total number of CBAM certificates surrendered must be documented in the report. Penalties are provided if a CBAM applicant has not surrendered sufficient CBAM allowances. For every ton of CO2 not reported, there is a penalty of €10 to €50.

The CBAM certificates are to be traded via a central platform of the EU Commission. It is specified that one CBAM certificate corresponds to one ton of CO₂e in gray emissions associated with a good. The price of a CBAM certificate is based on the average calendar week price for EU-ETS certificates.

The CBAM regulation is to be continuously developed. By the end of the transition period, the EU Commission will already be working on a method for the extended consideration of indirect emissions and will examine the possibility of including additional products. By the end of 2027, the European Commission intends to carry out a complete review of the CBAM. This will include possible progress in international negotiations on climate change and the impact on imports from developing countries, particularly least developed countries (LDCs). By 2030, all goods covered by EU-ETS are to be included.

How are gray emissions calculated?

In the CBAM, greenhouse gases that are released into the atmosphere as a result of the production of goods are referred to as emissions. Annex I of the CBAM Regulation provides information on the GHG emissions currently taken into account for each type of goods. These include CO₂ (carbon dioxide), N2O (nitrous oxide) and PFCs (perfluorocarbons).

The gray emissions to be reported consist of two components. On the one hand, the direct emissions released during the manufacturing process of a product are taken into account, including the emissions that are generated independently of location during the generation for heating and cooling for the manufacturing process of the product. Secondly, indirect emissions released during the generation of the electricity required for the production of the goods are included. Indirect emissions are to be accounted according to Annex II of the CBAM Regulation for electricity, cement, and fertilizer.

In addition, CBAM goods are divided into simple and complex goods. In the production of simple goods, only precursors and fuels are included, for which no gray emissions are to be considered. Complex goods, on the other hand, are made up of precursor materials for which gray emissions from their manufacturing process must be taken into account. These must be determined first and then added to the gray emissions of the complex goods. Annex II of the Implementing Regulation provides information on the relevant precursor substances to be taken into account.

The calculation of grey emissions is done according to the specifications of Annex IV of the CBAM Regulation and the specifications in Annex III of the Implementing Regulation. It is mandatory to choose the best available data source. Annex III A.3 of the Implementing Regulation defines important guiding principles in this regard. As a general rule, direct and indirect emissions are first determined on a plant-specific basis. The goods-specific production processes are then assigned in order to finally calculate the specific gray direct and indirect emissions per ton of goods.  In general, the aim is to use primary data from on-site monitoring to determine so-called actual emissions, which are then used to calculate the specific gray emissions.

Since the establishment of appropriate monitoring systems takes time, a step-by-step establishment of the required methods is envisaged. Initially, until July 31, 2024, it is acceptable to use methods other than those specified in the CBAM Regulation and the Implementing Regulation to determine emissions if the data required for the specified methods are missing. In this case, the EU Commission will provide standard values, which are already partly included in Annex III of the Implementing Regulation. By December 31, 2024, more precise calculation methods must then already be followed, which can, however, still be based on the conditions at the production site, provided that these are comparable with the determination methods finally envisaged. From 2025, the specific gray emissions must be determined using one of two specified approaches. These are based either on a calculation of measured material flows from a production plant using calculation factors from laboratory analyses or standard values specified by the EU Commission, or on measurements of the exhaust gas flow and the greenhouse gases contained therein from a production plant. The further specification of these methods is described in Annex III B of the Implementing Regulation. The EU Commission provides guidelines and an Excel spreadsheet to support data collection and transmission.

What administrative and legal challenges are associated with the CBAM?

Major challenges in implementing the CBAM lie primarily in the administrative and legal areas. The EU Commission wants to keep the administrative burden to a minimum by providing templates and handling the processes digitally via a uniform platform.

However, the detailed CO₂ balancing of all imported goods concerned poses a number of challenges, especially since the necessary processes for collecting data on the entire production route of a good still have to be established. Not only linguistic, but also technical and logistical hurdles have to be overcome. In addition, a basic understanding of the determination of greenhouse gases is necessary in order to be able to use the prescribed methods of the CBAM in a meaningful way. Furthermore, a continuous updating of the data has to be established. The gradual introduction of the CBAM regulation and the processing aids provided should provide significant support in this regard.

From the outset, the implementation of CBAM requires the development or expansion of expertise and, depending on the data situation, time for the collection and documentation of the required information. In addition, from 2026, the economic handling of CBAM certificates requires the establishment of new administrative processes. These are necessary for the quarterly purchase of the required CBAM certificates. Also, the correct determination of the CBAM allowances to be surrendered annually, requires supplementary information on EU-ETS certificates issued free of charge. In addition, the repurchase of surplus CBAM certificates must be requested each year by June 30, otherwise they will be cancelled.

It is disputed whether the implementation of the CBAM is compatible with the principles of the World Trading Organization (WTO). The EU Commission considers that the CBAM is compatible with the current regulations. However, there is a risk that the EU’s trading partners will perceive the measure as a trade barrier and react with countermeasures. They could, for example, challenge the CBAM system at the WTO panel. The introduction of CBAM could therefore lead to trade law and policy disputes. Whether this will happen remains to be seen.

The EU Commission will also have to observe to what extent attempts are being made to circumvent the CBAM regulation. This could be done, for example, by making small changes to the imported goods so that they are assigned to CN codes that do not fall under the CBAM. This could be countered with an expansion of the goods taken into account.

What important dates and deadlines need to be considered?

• 10.05.2023: Regulation (EU) 2023/956 (CBAM Regulation) adopted.
• October 1, 2023 CBAM Regulation comes into force
• August 15, 2023 CBAM Implementing Regulation (EU) 2023/1773 to regulate the transition period.
• By January 31, 2024 first CBAM report on 4th quarter 2023 to be submitted
• Until July 31, 2024 simplified calculation method of grey emissions allowed
• From December 31, 2024: Only authorized CBAM declarants may import CBAM goods into the EU
• Until June 30, 2025 further CBAM Implementing Regulation according to Article 7(7)
• Until December 31, 2025 transition period
• From January 1, 2026: Start of full implementation, i.e. obligation to purchase certificates with phased increase of cost burden over the following years
• Until 2034: Gradual phasing out of free EU ETS allowances for CBAM goods.

Further information

• CBAM information page of the DEHSt (not yet available in English)
• CBAM information page of the customs portal (not yet available in English)
• Further information and support material from the EU Commission
• DEFAULT VALUES FOR THE TRANSITIONAL PERIOD OF THE CBAM
• Transitional CBAM Registry user manual for Declarants by the EU-Komission
• Info: What new regulatory requirements are companies facing?

Literature

[1] Europäisches Parlament und Europäischer Rat (2023): VERORDNUNG (EU) 2023/956 DES EUROPÄISCHEN PARLAMENTS UND DES RATES vom 10. Mai 2023 zur Schaffung eines CO2-Grenzausgleichssystems. https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32023R0956 (abgerufen am 11.10.2023).

[2] Europäisches Kommission (2023): DURCHFÜHRUNGSVERORDNUNG (EU) 2023/1773 DER KOMMISSION vom 17. August 2023 mit Vorschriften über die Anwendung der Verordnung (EU) 2023/956 des Europäischen Parlaments und des Rates in Bezug auf die im Übergangszeitraum geltenden Berichtspflichten für die Zwecke des CO2-Grenzausgleichssystems.  https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32023R1773 (abgerufen am 11.10.2023).

[3] Agora Energiewende, Agora Verkehrswende SK (2021): Klimaschutz-Sofortprogramm. https://static.agora-energiewende.de/fileadmin/Projekte/2021/2021_06_DE_100Tage_LP20/A-EW_229_Klimaschutz-Sofortprogramm_WEB.pdf (abgerufen am 11.10.2023).

[4] SPD, Bündnis 90/Die Grünen, FDP (2021): Koalitionsvertrag 2021-2025. Mehr Fortschritt wagen – Bündnis für Freiheit, Gerechtigkeit und Nachhaltigkeit. https://www.spd.de/fileadmin/Dokumente/Koalitionsvertrag/Koalitionsvertrag_2021-2025.pdf (abgerufen am 11.10.2023).

[5] Europäisches Parlament und Europäischer Rat (2003): RICHTLINIE 2003/87/EG DES EUROPÄISCHEN PARLAMENTS UND DES RATES vom 13. Oktober 2003 über ein System für den Handel mit Treibhausgasemissionszertifikaten in der Gemeinschaft und zur Änderung der Richtlinie 96/61/EG des Rates. https://eur-lex.europa.eu/legal-content/DE/TXT/?uri=celex%3A32003L0087 (abgerufen am 11.10.2023).

[6] Europäischer Rechnungshof (2020): Emissionshandelssystem: kostenlose Zuteilung von Zertifikaten gezielt vornehmen. https://op.europa.eu/webpub/eca/special-reports/emissions-trading-system-18-2020/de/ (abgerufen am 11.10.2023).

[7] Umweltbundesamt Deutsche Emissionshandelsstelle (2022) (DEHSt): Europäischer Emissionshandel. https://www.dehst.de/DE/Europaeischer-Emissionshandel/Reform-Perspektiven/Carbon-Leakage-Schutz/carbon-leakage-schutz_node.html (abgerufen am 11.10.2023).

[8] Agora Energiewende, Wuppertal Institut (2019): Klimaneutrale Industrie: Schlüsseltechnologien und Politikoptionen. https://www.agora-energiewende.de /veroeffentlichungen/klimaneutrale-industrie-hauptstudie/ (abgerufen am 11.10.2023).

[9] Europäisches Parlament (2022): CBAM: Parliament pushes for higher ambition in new carbon leakage instrument. https://www.europarl.europa.eu/news/de/press-room/20220603IPR32157/cbam-parliament-pushes-for-higher-ambition-in-new-carbon-leakage-instrument (abgerufen am 11.10.2023).

[10] Umweltbundesamt (2023): Einführung eines CO2-Grenzausgleichssystems (CBAM) in der EU. https://www.umweltbundesamt.de/publikationen/einfuehrung-eines-co2-grenzausgleichssystems-cbam (abgerufen am 11.10.2023).