In depth

What is CBAM?

CBAM is one of the legislative measures under the "Fit for 55" package in the EU's European Green Deal. The main purposes of "Fit for 55" are to reduce the EU's greenhouse gas (GHG) emissions by at least 55% by 2030 when compared to 1990 levels. CBAM is a measure designed to complement the EU's Emissions Trading System (EU ETS), targeting imports of carbon-intensive products. The EU ETS is a mandatory GHG emissions trading system utilizing carbon pricing mechanisms for industries contributing high levels of GHG emissions. However, there may be a situation that business operators who are subject to EU ETS decide to move their production bases to countries where there are less restrictions on GHG emissions and then export goods with high-level emissions back into the EU, hence causing "carbon leakage." CBAM is aimed to prevent this carbon leakage to ensure the effectiveness of the EU's mechanisms on climate change by filling in the gaps of the EU ETS. It covers six types of goods: iron and steel, aluminum, fertilizer, cement, electricity and hydrogen. The scope of CBAM goods also includes some downstream goods, such as knots and screws made from iron, and cable wires made from aluminum.

Implementation timeline of CBAM

CBAM has been in effect since 17 May 2023. The CBAM implementation timeline can be divided into three periods, as follows:

• Transitional Period (1 October 2023 to 31 December 2025). This period aims to be a "learning phase" where the relevant parties must prepare to establish and tailor their methods to collect and measure necessary data for calculating emissions of CBAM goods during the production process, defined as "embedded emissions." In this period, purchasing a CBAM Certificate, an instrument for imposing a carbon price on CBAM goods, is not yet required. However, the applicable importers or EU indirect customs representatives must report to the European Commission the amount of embedded emissions on a quarterly basis. The information on the amount of embedded emissions that needs to be reported during this period does not need to be verified.
• Definitive Period (1 January 2026 to 31 December 2033). During this period, only authorized CBAM declarants can import goods into the EU. CBAM Certificates, based on the amount of imported CBAM goods and their respective embedded emissions, must be purchased and surrendered. Furthermore, the reporting of embedded emissions must be made on an annual basis and this information must be verified by an accredited verifier. CBAM obligation in the form of CBAM Certificates will phase in with increasing coverage from 2026 and the free allocation under the EU ETS will gradually phase out. Note that, the EU regulators are planning to widen the scope of CBAM goods to be in line with the EU ETS by including other sectors covered under the EU ETS by 2030, which we anticipate will be clarified after CBAM is reviewed in 2025.
• Fully Effective Period (from 2034 onwards). CBAM will become fully effective, meaning that the embedded emissions of CBAM goods will be fully covered under CBAM and no free allocation will be given under the EU ETS for CBAM goods.

How Thai business operators can prepare themselves for CBAM

CBAM will require relevant business operators to adapt in many ways. In the transitional period, business operators that export CBAM goods to the EU should deepen their understanding on the requirements under CBAM, including preparation to obtain information relating to the embedded emissions of relevant CBAM goods to provide to their importers with reporting obligations, when requested. Without such information, the importers may be required to use default values of embedded emissions (which generally indicate higher values than the actual embedded emissions). This may result in the increase of the amount of CBAM Certificates that must be purchased by the importers and they may consider buying goods from other exporters that have more readily available information on the embedded emissions of their goods. As for the definitive period, business operators may need to develop their production process to enable continuous reduction of the embedded emissions since the EU ETS free allowance will be lowered every year. If the amount of embedded emissions of Thai exporters is still the same, it will mean that the required amount of CBAM Certificates will increase every year.

In the big picture, Thailand has not exported goods to the EU in as high a ratio when compared to exports to the US, China or Japan, and CBAM may not have a great effect on overall Thai exporters. Nevertheless, it must be taken into consideration that the product scope of CBAM may widen to cover goods under the EU ETS, which will allow it to regulate other goods in the future, for example, goods relating to petroleum, ceramics, glass, pulp and paper.

Global trends

Other than the EU's CBAM, there are some other countries which plan to adopt similar types of laws or policies, for example, the US, Canada, the UK, and Australia. If these draft laws or policies are adopted, they will be effective at a different time period from CBAM. In addition, the product scope may also be set differently from CBAM since there are many other carbon-intensive and energy-intensive industries, including crude oil, petroleum, ethanol, glass, paper, plastic, and industries that are relevant to the production of these goods. Thus, business operators should closely monitor the development of these mechanisms or measures that are relevant to GHG emissions reduction which may affect their business in the future.

To conduct business sustainably, global business operators are encouraged to be aware of managing risks arising from international environmental policies and regulations, as CBAM is only one of many such measures.