What is CBAM and how will it impact trading with the European Union?🛃
CBAM puts a tax on the import of carbon-intensive goods into the EU
As part of the European Union’s Green New Deal, its member states have committed to being carbon neutral by 2050 and reducing their emissions by at least 55% by 2030.
To help finance this green transition, the EU has launched the Carbon Border Adjustment Mechanism (CBAM).
If your organisation imports or exports cement, iron, steel, aluminium, fertiliser, electricity or hydrogen to the EU you will be impacted by this regulation.
CBAM implementation is already underway
CBAM came into effect in May 2023 and there are two phases for implementation:
Transitional phase (October 1st, 2023 - December 31st, 2025):
In this first phase, companies will have to start by disclosing quarterly the greenhouse gas emissions embedded in their imports.
If companies fail to disclose their emissions, the penalties will range between €10 and €50 per tonne of unreported emissions.
Definitive phase (January 1st, 2026, onwards):
On this date, CBAM will come into full effect. By then, companies will be required to purchase CBAM certificates for the emissions embedded in the goods they are importing into the EU.
With CBAM regulation coming rapidly into effect, importing companies need to be proactive in collecting emissions data from their suppliers outside the EU to ensure their quarterly disclosures comply with this new regulation.
The impact of CBAM on companies importing and exporting into the EU
Importing companies need to collect emissions data from their supply chain and disclose a quarterly CBAM report to the European Commission.
From July 31, 2024, this data must be based on product-level carbon footprint assessments for all materials that fall within the scope of CBAM.
In our experience, product-level carbon footprint (PCF) assessments have been the preserve of only the most mature organisations when it comes to sustainability.
PCF’s require organisations to break down each step of their production process to calculate the embodied emissions of raw materials and the emissions of energy used to process these materials into a finished product.
Because of CBAM if EU exporters from the United Kingdom, Americas, and Asia, for example, can not disclose product-level emissions data to their EU customers from July 31, 2024, they risk losing their access to the market.
Once we enter the definitive phase in 2026, importing companies need to purchase CBAM certificates (giving them the right to emit) for the emissions embedded in their imports. The price of these certificates will match the EU Emissions Trading Scheme (ETS) pricing.
If EU exporters don’t take steps to decarbonise before 2026 their commercial competitiveness will sharply decline.
“Bloomberg expects the price of EU emissions under the ETS to be €65 per metric ton this year, before more than doubling to €146/t by the end of the decade. Prices could approach the €200/t milestone in 2035.”
Strong emissions measurement is the foundation of CBAM compliance
At the heart of the CBAM is the need for companies to accurately measure their greenhouse gas emissions and transparently disclose them.
To calculate the emissions embedded in their imports, EU companies must collect data from their suppliers concerning the direct and indirect emissions generated during the manufacturing process of the goods.
Collaborating with suppliers to collect this data will require efficient supplier engagement programs. A regulation such as CBAM will allow companies to reap the financial benefits of sustainable procurement by identifying ways to source lower-carbon goods.
By pricing carbon, companies in the EU and those wishing to trade with them will be incentivised to reduce their emissions in line with the EU decarbonisation ambitions. This strategic instrument will allow companies to differentiate themselves and drive down costs by reducing their emissions.
Equipoise are uniquely positioned to help organisations with emissions measurement, supplier engagement and decarbonisation. Connect with us to explore how you can ensure compliance with the Carbon Border Adjustment Mechanism.
