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published on 24 June 2024 | reading time approx. 3 minutes
The CBAM is already posing several challenges for companies importing goods from outside the EU. Following its challenging start earlier this year, the next set of tasks is already on the horizon.
The EU's Carbon Border Adjustment Mechanism (CBAM) has been in effect since 2023. Affected companies were required to submit their first CBAM report by January 31, 2024. Despite initial difficulties, the CBAM cycle for companies is now underway, and initial insights have been incorporated into the second report due on April 30, 2024.
CBAM is the EU's response to concerns about so-called carbon leakage caused by the EU Emissions Trading System. As emissions become more expensive in the EU and the free allocation of emission certificates is phased out, manufacturing companies might relocate outside the EU due to cost pressures. This would harm the EU economy without reducing overall emissions. Therefore, CBAM aims to price the import of goods and their associated emissions when goods enter the EU. This equates production costs inside and outside the EU concerning emissions pricing.
CBAM is being implemented in two phases: The transition phase began with the start of the monitoring period in Q4/2023 from October 1, 2023, and the submission of the first report by January 31, 2024. The monitoring period for the final phase starts on January 1, 2026, with the first definitive CBAM declaration for the year 2026 due by May 31, 2027. During this period, certificates must be purchased and submitted for the first time.
The CBAM report (to be submitted during the transition phase) and the CBAM declaration (to be submitted during the final phase) contain similar content, but the compliance program differs in several areas. This is partly because the transition phase is intended as a learning period for all parties involved, including the EU, which aims to gather experience and data.
However, this complex mechanism presents several challenges for importers in the EU.
Apart from the technical and organizational initial difficulties, as expected, the main challenge lies in collecting the required data. So far, default values could be used in full. This has facilitated data collection since reporters needed to request fewer data from their suppliers.
However, these default values can only be used until July 31, 2024, covering the entire third CBAM report for Q2/2024 (Article 4(3) of the CBAM Implementing Regulation). For subsequent reports during the transition period, these values can no longer be fully relied upon. They can only be used in exceptional cases, such as under Article 5 of the CBAM Implementing Regulation. According to this, up to 20% of the total embedded emissions associated with complex goods can be based on estimates, including default values, provided by the facility operators.
This means that for goods imported from August 1, 2024, the EU's data collection methods must be applied. CBAM reporters are highly dependent on their suppliers for this. To fulfill their reporting obligations, importers must request a significant amount of data from their suppliers, over whom they have little control. However, importers remain responsible and potentially liable under the CBAM regulations. Accurate and complete data are thus in their best interest.
In the final CBAM phase starting in 2026, default values can still be used to some extent. However, these are always subject to a safety margin or are based on the average of the worst-performing EU ETS facilities. Therefore, using actual values is beneficial. Additionally, during the final phase, default values will be based on the data submitted during the transition period (see Appendix 4, No. 4.1 of the CBAM Regulation). Thus, accurately determined values will be beneficial for all participants even during the transition period.
The EU has already published an Excel template (“CBAM Communications Template”) for communication with suppliers. While its use is not mandatory, it provides a guideline on what data is needed and should be requested. The template is extensive, making it quite burdensome for suppliers to fill out. Therefore, it is in the importers' interest to implement some quality control and ensure compliance with the obligations.
First, suppliers need to be informed about CBAM and the resulting obligations for both them and the importers. Contract adjustments should also be considered, including the obligation for suppliers to provide the necessary data and stipulations for non-compliance. Contact with suppliers should be initiated as soon as possible (if not already done), as the communication process can be lengthy, especially with language barriers.
When selecting new suppliers, it is crucial to discuss the emissions potential of imports in the future. Choosing suppliers familiar with the topic and committed to reducing emissions can be beneficial, saving both costs and effort. Additionally, sourcing from different countries could be advantageous. In the final phase, certificates must be purchased for imported emissions, which adds a cost factor. However, emission costs already paid in countries with similar emissions trading systems to the EU can be deducted. Currently, these include parts of the USA and Canada, as well as Mexico's and China's emission systems. Important trade partners like India and Brazil are also considering implementing such systems. Establishing long-term trade relationships there now could be beneficial.
As a last resort, considering a change of suppliers might be worthwhile if communication about emissions-related issues proves difficult or if there is a lack of sensitivity to the topic.
CBAM represents an additional burden for already heavily taxed companies in manufacturing or importing sectors. However, it can also present an opportunity to optimize costs compared to competitors and simultaneously address ESG obligations, whether mandated by law or self-imposed. Investing effort now in preparing for CBAM compliance during the transition period is already proving beneficial and positions businesses optimally for the future. Given the complexity of the topic, seeking legal support is advisable in any case.
Leopold Gottinger
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