In December 2022, the European Council and the European Parliament reached an agreement of a provisional and conditional nature on the Carbon Border Adjustment Mechanism (CBAM). The agreement needs to be confirmed by ambassadors of the EU Member States and by the European Parliament, and adopted by both institutions before it is final. CBAM is one of the EU’s climate actions, designed to prevent the EU’s efforts to reduce greenhouse gas (GHG) emissions from being offset by increased emissions beyond its borders as a result of relocation of production outside the EU or by increased imports of carbon-intensive products (so-called “carbon leakage”).

CBAM deals with imports of products produced in carbon-intensive industries and is designed to work alongside the EU ETS, complementing its functioning for imported goods. CBAM will gradually replace the existing EU carbon leakage mechanisms, in particular free allocation of allowances under the EU ETS. As a result of the adoption of the above regulation, GHG emission fees will be equivalent for imported products and EU products, and the operating conditions will be equal for everyone. As a result, CBAM can be an effective means of reducing emissions in third countries while ensuring a level playing field for EU industry.

CBAM will deal with specific products, which will initially include: iron and steel, cement, fertilisers, aluminium, electricity, organic chemicals, hydrogen, ammonia and plastics. The regulation will also apply to indirect emissions from the generation of electricity consumed during the production of goods.

Goods will only be allowed to be imported into the customs territory of the EU by a declarant (within the meaning of the Union Customs Code) lodging a customs declaration who has been authorised by the CBAM authority.

By 31 May of each year, authorised declarants will be required to submit a CBAM declaration for the previous year stating:

  • the total quantity of each type of goods imported in the previous year expressed in tonnes (in the case of electricity in megawatt hours);
  • the total embedded emissions (i.e. direct emissions released during the production of the goods), expressed in tonnes of CO2e (CO2, nitrous oxide and perfluorocarbons) emissions;
  • the total number of CBAM certificates corresponding to the total embedded emissions, to be surrendered;
  • a copy of the verification report issued by an accredited verifier.

Authorised declarants will be required to purchase CBAM certificates for surrendering. The CBAM authority will sell the CBAM certificates at a price calculated on a weekly basis reflecting the average price of EU ETS allowances determined through auction.

Penalties will be imposed on authorised declarants who fail to surrender, by 31 May of each year, the number of CBAM certificates corresponding to the emissions embedded in goods imported during the previous year or who submit to the CBAM authority false information related to actual emissions with a view to obtaining a favourable individual treatment, equivalent to three times the average price of CBAM certificates in the previous year for each CBAM certificate that the authorised declarant did not surrender. In addition, a payment of the penalty will not release the authorised declarant from the obligation to surrender the remaining number of CBAM certificates to the CBAM authority.

According to the current timetable, CBAM will start operating as of October 2023, but in the initial phase it will only cover reporting obligations. Starting from 1 January 2027, it will become fully applicable.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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