EU Carbon Border Adjustment Mechanism (CBAM) has been saved
EU Carbon Border Adjustment Mechanism (CBAM)
The state of play and ways forward
On 14 July 2021, the European Commission proposed a CBAM, which effectively entails a levy on the import of certain goods produced outside of the EU based on the involved carbon emissions. The legislative process on the adoption of the CBAM is now reaching its critical point. Please continue reading to learn more about the current state of this process and implications for business.
Carbon Border Adjustment Mechanism (CBAM)
On July 14th, 2021, the European Commission (Commission) proposed the regulation establishing a ‘Carbon Border Adjustment Mechanism’ (CBAM). Recently, on March 15th, 2022, the CBAM proposal has been approved by the Council of the EU with minor amendments, which means that it is one significant step closer to being adopted as EU legislation and becoming a reality for businesses importing products covered by the CBAM into the EU.
CBAM in a nutshell
The general principles of CBAM are as follows (see also this alert):
- CBAM aims to prevent ‘carbon leakage’ by subjecting the import of certain groups of products from 3rd (non-EU and non-EFTA) countries to a carbon levy, as they would have been based on the ‘EU-ETS’ if those products would have been produced within the EU;
- Initially 5 groups of products are covered: cement; iron and steel; aluminium; fertilizers; and electricity. This list of products will be expanded over the course of the coming years (see also below);
- EU importers must purchase CBAM certificates covering the ‘embedded emissions’ (i.e. direct emissions occurring during the production) of the (to-be) imported products;
- CBAM certificates can be purchased from the designated local authorities in the EU Member States and prices of the certificates will be based on the weekly average price of ‘EU ETS emission allowances’;
- Importing any CBAM products and purchasing CBAM certificates will require a special authorisation (the ‘Authorised Declarant’), which can be applied for by EU importers or representatives who will act on behalf of one or more importers.
Next steps for the CBAM
The next step for realisation of the CBAM is approval from the EU Parliament. Based on the Draft ENVI Report published on December 21st, 2021, the EU Parliament is however expected to propose significant amendments to the CBAM, including the following:
- Expanding the scope to also cover certain chemicals and polymers;
- Expanding the scope to also cover indirect emissions of the production of covered products;
- Speed up the implementation date of the CBAM from January 1st, 2026 to January 1st, 2025;
- Create a centralized EU CBAM authority, rather than to appoint local authorities in EU Member States.
If the EU Parliament suggests amendments, they will then need to be agreed on by the Council of the EU in order to be included in the final legislative text.
What to do
While details are to be agreed upon, it is clear that the CBAM is coming and that businesses should start preparing. Currently the CBAM is proposed to be implemented with a transitional period starting on January 1st, 2023, at which point EU importers will be faced with reporting requirements of the embedded emissions of covered products imported by them.
We recommend EU importers of products covered by the CBAM to carry out a review of their supply chain to determine the potential impact of the CBAM on it, as well as to start determining the amount of embedded emissions and potentially the indirect emissions created during the production process so the reporting obligations can be met.
How we can help
Deloitte’s Global Trade Advisory specialists are part of a global network of professionals who provide specialised assistance in global trade matters, including on the topic of CBAM. Our professionals can support in carrying out supply chain reviews in the light of the CBAM implementation and transitional period.
For more information about the impact the CBAM can have on your business and our capabilities in this regard, please contact one of our experts.