Understanding the EU’s Carbon Border Adjustment Mechanism (CBAM)

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What is the CBAM

On May 17, 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) regulation entered into force. Positioned as a core component of the EU’s ‘Fit for 55’ climate strategy, its main objective is to work alongside the EU Emissions Trading System (EU ETS). The mechanism ensures that emissions costs are uniform for both imported goods and those manufactured within the European Union. This approach aims to counteract ‘Carbon Leakage’, a challenge that emerges due to the EU’s elevated climate policy standards in the global context.

The CBAM will commence its transitional phase on October 1, 2023, with the inaugural reporting period for importers concluding on January 31, 2024. Further details, including reporting obligations and methodologies for calculating embedded emissions, were delineated in an Implementing Regulation adopted on August 17, 2023.

Additionally, the relevant guidelines for EU importers and non-EU facilities were published, along with an Excel template for CBAM communication within the supply chain. Furthermore, the EU Commission plans to introduce an IT tool to assist companies in implementing the CBAM.

Scope and Affected Product Groups

The CBAM will initially cover electricity, hydrogen, fertilizers, cement, aluminum, iron, and steel. All businesses within the European Union (EU) importing the products listed below (specified by their HS-Code) from non-EU countries will be subject to the CBAM regulations:

Aluminum: 7601, 7603-7608, 76090000, 7610, 76110000, 7612, 76130000, 7614, 7616

Iron and Steel: Chapter 72, excluding: 7202 20, 7202 30, 7202 50, 7202 70-72029980, 7301, 7302, 730300, 7304-7311, 7318, 7326

 Fertilizers, Ammonia, Potassium Nitrate: 28080000, 2814, 28342100, 3102, 3105

Electricity: 27160000

Cement: 25231000, 25070080, 25232100, 25232900, 25233000, 25239000

Hydrogen, Iron Ore: 280410000, 26011200.

An expansion of affected products is anticipated in the future. All imports from third countries in the specified sectors will fall under CBAM rules, with exceptions for those participating in the ETS or with a similar emissions trading system.

Implementation: Key Considerations

For companies and investors involved in the value chains of relevant goods imported into the EU, it’s essential to be aware of the following main elements of the CBAM regulation:

  1. Transitional Phase: From October 1, 2023, to December 31, 2025, CBAM will undergo a transitional phase. During this time, select importers or their representatives are required to provide quarterly reports on the goods they import. This will include details about embedded emissions and the carbon pricing from the respective countries of origin. The complete CBAM system is slated for a January 1, 2026, launch.
  2. CBAM Declarants: Only authorized ‘CBAM declarants’ will have the right to import specific goods into the EU after the transitional phase. National authorities will endorse these declarants, who will then be added to an EU-wide CBAM registry. Potential declarants can apply for this status starting December 31, 2024.
  3. Reporting Requirement: Starting in 2027 (for the data of 2026), CBAM declarants are obligated to submit annually, by May 31, comprehensive details on the carbon emissions of their imported goods. This submission must also include verification reports from accredited bodies.
  4. CBAM Certificates: Declarants are required to purchase CBAM certificates – electronic tokens equivalent to one tonne of CO2 emissions from their imports. The value of these certificates will be adjusted according to the carbon pricing outside the EU and any EU ETS allowances that are issued for free. These certificates, which are non-tradable, will be available on a central platform. Their pricing will align with the average weekly closing rates of ETS allowances.
  5. Expansion of CBAM: The EU foresees an expansion of CBAM to encompass all goods currently under the ETS umbrella. The integration of refinery products and organic basic chemicals will be examined in future feasibility studies.
  6. Phasing Out Carbon Leakage Measures: The primary objective of introducing CBAM is to gradually replace the existing carbon leakage prevention measures in the EU ETS. This will result in an end to the issuance of complimentary emission allowances for EU-based producers of carbon-intensive commodities.

CBAM Impact on Thai Industry

The complexities of measuring, verifying, and reporting emissions will be paramount, compounded by rising carbon costs. As more global regions adopt CBAM-like mechanisms, these challenges are expected to grow. Still, confronting these issues will accelerate a transition towards a low-carbon economy. CBAM can also stimulate innovative eco-friendly business opportunities and drive industries closer to net zero targets.

However, according to the Thai press 7, many Thai businesses may struggle to meet the requirements of the CBAM. The Department of Trade Negotiation is working with various organizations to help Thai stakeholders prepare for CBAM.

To ensure your business remains compliant and competitive under CBAM, please contact our experts for guidance by emailing [email protected] or using the contact form provided. Please click here for more information about Silk Legal’s ESG practice.

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