Understanding the Carbon Border Adjustment Mechanism

The CBAM or Carbon Border Adjustment Mechanism is a type of tariff or tax on products involving significant carbon consumption in their lifecycle. With the aim of reducing carbon emissions from imported goods and creating a fair trade environment, the CBAM has attained significant importance for the trading community.

Let’s dive deeper to understand the meaning, mechanism, and impact of this new initiative.

What is CBAM?

The carbon border adjustment mechanism (CBAM) project was introduced by the EU, a part of the European Green Deal which will come into effect in the year 2026. The CBAM is designed to be compatible with WTO (World Trade Organization) rules. The regulation on the CBAM officially entered into force on May 17, 2023, and the CBAM transitional period will start from October 1, 2023, to 31st October 2025. This is only applicable to EU countries.

Prior to this initiative, industries working on mitigating the risk of carbon leakage used to get allowances under the EU ETS (Emission trading scheme). After the introduction of CBAM, these allowances will be gradually discontinued and will aim to reduce the carbon cost from EU countries. Similar costs will be further introduced within non-EU countries, aiming to reduce carbon emissions from both EU and non-EU traders exporting to the EU.

The primary objective of this project was to reduce carbon emissions by 55% by 2030 and to achieve zero greenhouse gas emissions.

According to the CBAM, the following goods will be impacted:

• Cement
• Iron and Steel
• Aluminum
• Fertilizers
• Hydrogen
• Electricity

CBAM helps to place a fair price on carbon-intensive goods, it also helps the traders to adopt more modern technologies which helps to reduce the emission of carbon. The CBAM is expected to have a transformational impact on companies engaged in international trade, reshape global trade, entail an ongoing administrative burden for non-EU businesses, have a gradual introduction, extend the scope, result in higher prices for European consumers, and have a risk of carbon leakage. The CBAM is a significant step towards achieving the EU's climate objectives and ensuring a fair and sustainable global economy.

How is CBAM Calculated?

To help operators share their information on embedded emissions with reporting declarants, the European Commission has provided a Voluntary Electronic Data Communication Template.

The template includes the following information:

Part 1 (Includes the data to be communicated to the reporting declarant)

Part 2 (Provides greater transparency of the data under Part 1, and allows the reporting declarant to carry out validation checks on Part 1) in the operators’ report, identifies what data is required for the reporting declarants to complete the CBAM report and what data is optional, and provides guidance on how to use the template and on the different calculations performed.

The template is user-friendly and automatically calculates CBAM-embedded emissions data from data inputs, showing how attributed emissions have been calculated for each production process. It also includes tools for facilitating reporting, for attributing emissions between heat and electricity for CHP/cogeneration, and for calculating the carbon price due.

How Will CBAM Work?

The CBAM has been designed in a way that it complies with the EU’s international regulation adhering to World Trade Organization (WTO) rules. Here are some crucial things to know about the CBAM initiative:

• It will only be applied to the products that are carbon-embedded, and imported in the EU.
• Once it is enforced from 2026, EU importers need to buy certificates corresponding to the carbon price that would have been paid and produced under the EU’s carbon pricing rules.
• If any non–EU producer has already paid a carbon price to any third country for the production of imported goods, then the cost will be deducted from the CBAM.
• By this, CBAM will also help the non-EU countries to reduce carbon leakages and introduce carbon Tax within the country.

Conclusion

The introduction of CBAM in international trade has led to a positive outcome and a sense of responsibility within the traders towards the environment. It will gradually help in the reduction of carbon emissions and also help third countries or non-EU countries to adopt the CBAM. To know more about such regulatory norms that can impact your global trading activities, Trademo Compliance can help.

Learn More