Everything you must know about the CBAM

The operational framework of CBAM is designed to be both rigorous and transparent, ensuring that the mechanism effectively achieves its intended goals without placing undue burdens on businesses. The implementation of CBAM will occur in phases, starting with a transitional period focused on data collection and reporting, followed by the full application of the mechanism, including the requirement to purchase CBAM certificates.

During the transitional phase, which began in 2023 and is set to run until 2026, EU importers are required to report the embedded emissions of their imported goods. This phase serves as a crucial learning period for both regulators and businesses, allowing them to adapt to the new requirements and to refine the methodologies used for calculating emissions. Importantly, during this phase, importers are not yet required to purchase CBAM certificates; instead, the focus is on gathering accurate emissions data and ensuring that all stakeholders are prepared for the definitive system.

The definitive system, which will be fully operational from 2026 onwards, introduces the obligation for importers to purchase CBAM certificates corresponding to the embedded emissions of their imports. The price of these certificates will be linked to the carbon price under the EU ETS, ensuring that imported goods face the same carbon costs as those produced within the EU. This creates a level playing field for EU industries and reduces the incentive for carbon leakage.

The CBAM reporting mechanism is structured to ensure that emissions data is accurate, verifiable, and consistent. Importers are required to provide detailed information on the production processes used to manufacture the imported goods, including the specific emissions factors associated with those processes. In cases where specific emissions data is not available, default values provided by the European Commission can be used. These default values are designed to reflect the average emissions intensity of similar products and provide a fallback option for importers.

For a detailed explanation of CBAM's requirements and timeline, see this article.

The introduction of CBAM is expected to have profound implications for a wide range of stakeholders, from businesses and consumers to governments and international organizations. These implications can be broadly categorized into the following areas:

CBAM is likely to have a significant impact on global trade patterns, particularly for industries that are heavily reliant on exports to the EU. For example, producers of steel, aluminum, and cement in non-EU countries may face higher costs if they are unable to reduce the carbon intensity of their production processes. This could lead to shifts in trade flows, with some countries potentially losing market share in the EU. At the same time, CBAM could create opportunities for countries and companies that have invested in low-carbon technologies, enabling them to gain a competitive edge in the EU market.

 One of the primary objectives of CBAM is to drive global emissions reductions by encouraging foreign producers to adopt cleaner production methods. By imposing a carbon price on imports, CBAM creates a financial incentive for producers in non-EU countries to reduce their carbon footprint. This could lead to a ripple effect, with more countries adopting carbon pricing mechanisms and other climate policies in response to the EU’s leadership. In this way, CBAM has the potential to contribute to a broader global effort to combat climate change.

The costs associated with CBAM are likely to be passed down the supply chain, resulting in higher prices for consumers. For example, the additional costs incurred by steel producers due to CBAM could lead to higher prices for cars, appliances, and other goods that rely on steel as a key input. While this may pose challenges for consumers, it also highlights the importance of transitioning to more sustainable production and consumption patterns. In the long term, CBAM could drive innovation in low-carbon technologies and promote the development of more sustainable supply chains.

The sale of CBAM certificates is expected to generate significant revenue for the EU, which could be reinvested in furthering the EU’s climate objectives. For example, the revenue could be used to fund research and development in low-carbon technologies, support the transition to renewable energy, or assist developing countries in adopting sustainable practices. This potential for revenue generation underscores the broader economic benefits of CBAM and its role in supporting the EU’s green transition.

While CBAM offers numerous benefits, it also raises concerns about its potential to exacerbate trade tensions and its impact on developing economies. Some critics argue that CBAM could be perceived as a protectionist measure, particularly if it disproportionately affects exporters from developing countries. These concerns highlight the need for careful implementation of CBAM, with an emphasis on fairness, transparency, and collaboration with international partners.

To understand the full impact of CBAM on businesses and economies, explore this article.

Implementing CBAM is a complex endeavor that presents a number of practical and political challenges. These challenges include:

The success of CBAM depends on the availability of accurate and reliable data on the carbon intensity of imported goods. Collecting and verifying this data across diverse global supply chains is a significant challenge, particularly in countries with less developed environmental regulations and monitoring systems. The European Commission has established guidelines for data collection and reporting, but ensuring compliance and consistency across all sectors and regions will require ongoing effort and cooperation.

Developing standardized methodologies for calculating embedded emissions is critical to ensuring that CBAM is applied fairly and consistently. The European Commission has provided default values for emissions factors, but these may not always accurately reflect the true carbon intensity of specific products. As such, there is a need for continuous refinement of these methodologies, as well as greater collaboration with industry stakeholders to develop more precise and tailored approaches to emissions calculation.

 The administrative requirements associated with CBAM, including reporting and compliance, could place a significant burden on businesses, particularly small and medium-sized enterprises (SMEs). These companies may lack the resources and expertise to navigate the complex regulatory landscape of CBAM, potentially putting them at a disadvantage. To address this, the European Commission has developed a range of support tools and resources to assist businesses in complying with CBAM’s requirements. However, there is still a need for greater simplification and streamlining of the administrative processes involved.

Critics of CBAM have raised concerns that it may be perceived as a protectionist measure, particularly if it leads to higher costs for exporters from developing countries. Some argue that CBAM could exacerbate existing trade imbalances and lead to retaliatory measures from affected countries. There are also concerns about CBAM’s compatibility with World Trade Organization (WTO) rules, which prohibit discriminatory trade practices. To mitigate these risks, the EU must engage in ongoing dialogue with its international partners and work to ensure that CBAM is implemented in a way that is fair, transparent, and compliant with international trade rules.

As CBAM evolves, it is likely to have a profound impact on the EU and global climate action. The following are some potential future developments and implications of CBAM:

CBAM is initially focused on a limited number of high-emission sectors, but there is potential for it to be expanded to cover additional sectors in the future. For example, the European Commission has indicated that it may consider extending CBAM to include other carbon-intensive industries such as chemicals and plastics. This expansion would further align global trade with the EU’s climate objectives and increase the pressure on other countries to adopt similar mechanisms.

CBAM could serve as a model for other countries and regions looking to implement similar carbon pricing mechanisms. For example, the United States and Canada have both expressed interest in exploring carbon border adjustments as part of their climate policies. As more countries adopt carbon pricing mechanisms, there is potential for greater integration and coordination of these policies at the international level. This could lead to the development of a global carbon pricing regime, which would create a level playing field for businesses and further incentivize emissions reductions.

The success of CBAM could also have broader implications for international climate agreements, such as the Paris Agreement. By demonstrating that it is possible to implement ambitious climate policies without compromising economic competitiveness, CBAM could help to build momentum for more aggressive global climate action. However, this will require ongoing international cooperation and a commitment to addressing the challenges and concerns associated with CBAM.

Several industry experts shared their insights on best practices for navigating the complexities of the Carbon Border Adjustment Mechanism (CBAM) in the Atlas Zero Podcast.

Marius Springer, featured in one of the episodes, underscores the importance of early preparation and proactive supplier engagement. As CBAM requires companies to gather accurate emissions data directly from their supply chains, Marius advises businesses to start this process early by communicating effectively with their suppliers. He emphasizes the need for companies to familiarize themselves with the European Commission's CBAM calculation methods and to guide their suppliers accordingly to ensure compliance. Additionally, Marius highlights the role of technology in managing the administrative burdens associated with CBAM. He recommends that businesses explore intuitive software solutions to automate processes like import classification and report submission, which can otherwise be time-consuming and error-prone. Viewing CBAM as an opportunity, Marius suggests that companies can enhance supply chain transparency and reduce costs by selecting lower-emission producers, positioning themselves to benefit from future sustainability regulations and fostering a more resilient and competitive business model in the long term.

Gabriel Rozenberg, in his interview, delves into the critical importance of data accuracy and traceability in complying with CBAM regulations. He points out that one of the most significant challenges companies face is obtaining precise carbon emission data directly from their supply chains. This requires deep engagement with suppliers, often pushing beyond traditional boundaries of transparency. Gabriel emphasizes that the complexity of CBAM lies not only in collecting this data but also in ensuring it is shared in a timely and accurate manner across the entire supply chain. He emphasizes that CBAM should be viewed not merely as a regulatory burden but as an opportunity to enhance supply chain transparency and reduce costs by choosing lower-carbon suppliers. By adopting this approach, companies can strategically position themselves for a sustainable future in the global market.