Background

The CBAM regulation ("Regulation") is part of the European Commission's Fit for 55 package aiming to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 (compared to 1990 emission levels) and was proposed by the European Commission ("Commission") on 14 July 2021. It was formally adopted on 10 May 2023 and entered into force seven days later. 

The Regulation targets imports from outside EEA countries or Switzerland of products in carbon-intensive industries and electricity. It will ultimately require importers to report the embedded emissions in certain carbon-intensive products – initially aluminium, cement, iron and steel, electricity, fertilisers, and hydrogen – and to buy certificates to account for these emissions. The CBAM will start with a transitional phase that will run from 1 October 2023 until 31 December 2025, during which only reporting obligations – but no carbon pricing – will apply. Carbon pricing (i.e., the obligation to buy the aforementioned certificates) will start applying from 1 January 2026. 

Once the carbon pricing phase starts, for covered products in the cement, fertilisers, and electricity sectors, both direct and indirect emissions must be priced, while for covered products in the iron, steel, aluminium, and hydrogen sectors, only direct emissions must be priced. 

The CBAM is intended to complement the EU Emissions Trading System (EU ETS) and to level the playing field between EU and non-EU businesses, ensuring that production of carbon-intensive goods does not shift from the EU to third countries to take advantage of less stringent climate policies. It is also designed to encourage other countries in the world to join the EU's climate efforts by introducing their own measures to tax or price emissions. This is why the product scope of the CBAM is meant to expand over time. More specifically, the explicit aim is that, by 2030, the products of all sectors covered by the EU ETS would also be covered by the CBAM. 

The transitional phase - New reporting rules

On 17 August 2023, the Commission published the implementing regulation regarding the CBAM reporting regulations during the transitional phase.

Reporting obligations 

The first reporting period for CBAM is Q4 2023, starting on 1 October 2023. The report for the first reporting period must be submitted no later than 31 January 2024. The last CBAM report of the transitional period, which is the report to be submitted for Q4 2025, should be submitted by 31 January 2026.

Within those reports, importers must, inter alia, report the following:

• The type of goods as identified by their CN code.
• The quantity of imported goods, the direct and indirect emissions embedded in them (calculated pursuant to specific methods, see below).
• Any 'carbon price'¹  already paid abroad for the emissions, including the carbon price paid for any precursor material embedded in the final product.
• The country where a carbon price is due.
• The country of origin of imported goods.
• The identity and location of the installations where the goods were produced.²
• The production routes used for the manufacturing of the goods (and associated production parameters) as defined in the implementing regulation.

The report must be submitted to the CBAM Transitional Registry, which will be managed by the Commission. The CBAM Transitional Registry will be a standardised and secure electronic database containing a trader portal through which importers can submit the quarterly CBAM reports. Both the local competent authorities and the Commission will have access to this portal and its data. According to official discussions between the Commission and Member States, this platform will be an additional module of the Economic Operator Registration and Identification (EORI) system (i.e., one of the EU's customs systems).

Once a report is submitted, it can only be amended or corrected until two months after the end of the relevant reporting quarter. In derogation from this general rule, the CBAM reports for the first two reporting periods may be amended or corrected until the submission deadline for the third CBAM report (i.e., Q2 2024), which is 31 July 2024.

The penalty for non-compliance, incorrect, or incomplete filing of a CBAM report shall be set by the individual Member State but must be between EUR 10 and EUR 50 per ton of unreported embedded emissions.

Calculation methods for embedded emissions

The implementing regulation stipulates the methods that can be used to monitor and calculate the embedded emissions of imported products. The rules applicable to the calculations of the embedded emissions depend on the specific production process and are highly complex. Moreover, for any given production process, the monitoring of GHG emissions must, by default, be done using one of the following two allowed methods ("EU Methods"):

1. The calculation-based approach: This means determining GHG emissions from source streams based on activity data obtained through measurement systems and additional parameters from laboratory analyses or standard values.
2. The measurement-based approach: This means determining GHG emissions from emission sources through continuous measurement of the concentration of the relevant greenhouse gas in the flue gas and the flue-gas flow.

Recognising the limited amount of time that importers and producers in third countries have had to adapt their processes to the CBAM's requirements, the implementing regulation foresees additional flexibility regarding allowed monitoring methodologies until 2025, with the following additional options: 

• Until December 2024: Other GHG emissions monitoring systems associated are allowed ("Other Methods"), namely: 

1. A carbon pricing scheme where the production installation is located.
2. A compulsory GHG emissions monitoring scheme where the production installation is located.
3. An emission monitoring scheme at the installation.

• Until 31 July 2024: For imports of goods where the reporting declarant lacks necessary information to use either the EU Methods or Other Methods, any methodology may be used, including using default values made available and published by the Commission for the transitional period or any other default values listed in Annex III of the implementing regulation. In such cases, the reporting declarant shall indicate, and reference in the CBAM reports the methodology followed for establishing such values.

Any method used other than EU Methods must, however, ensure similar coverage and accuracy as the EU Methods.

In order to perform the calculation for embedded emissions of complex goods (i.e., mainly downstream products), operators must also monitor and report to the reporting declarant(s) the quantities of specific input materials (the so-called "precursors") which themselves have embedded emissions used in the manufacturing process. Operators must further determine the embedded emissions of these precursors, which need to be added to the direct and indirect emissions attributed to the production process. The relevant precursors for each production process are identified in Annex II to the implementing regulation, while additional qualifying parameters that need to be reported are listed in Annex IV to the implementing regulation. 

In this context, reporting declarants will be allowed to utilise "default values" (to be published by the Commission) for input materials or subprocesses contributing to less than 20% of the total emissions of complex goods.

Recommended actions

The CBAM's reporting requirements enshrined in the implementing regulation are some of the most far-reaching GHG emissions reporting requirements that have ever been adopted. Although the type of emissions to be reported under the CBAM's requirements are not as extensive as those covered by Scope 3 GHG emissions (often calculated in ESG reports), the methodology imposed by the CBAM is significantly more specific and data-intensive, as it only marginally allows the use of the type estimates that are commonplace for Scope 3 GHG emissions. 

In practice, the CBAM's reporting requirements will thus likely have significant consequences in terms of the information that will need to be exchanged throughout supply chains, and data that businesses will need to ask from suppliers. This also means that imports of CBAM-covered products into the EU will require a sophisticated GHG monitoring, calculation and reporting apparatus.

It is recommended that businesses: 

• Understand the obligations coming into force on 1 October 2023 and throughout the transitional period, including the list of data that will be needed for reporting purposes.
• Understand how the CBAM's requirements apply to them specifically. This notably involves answering the following questions:
  • Which of your products are covered by CBAM?
  • What GHG emissions reporting requirements apply to each kind of product, and what is the applicable production pathway?
  • Importer of Record (IoR) - Groups with multiple entities acting as IoR within the same market may consider a centralized CBAM structure:
    • Consider simplifying your importing structure where one (or a limited amount) entity would be responsible for all matters related to CBAM (i.e. calculations, reporting, etc.).
    • Companies to assess whether minor changes to their supply chain could reduce the number of entities exposed to CBAM and have one central entity responsible for the Group obligations. 
  • Depending on a company's supply chain, they may consider existing mitigation/exemption strategies:
    • CBAM is a consumption tax that will be levied on goods which are imported/consumed within the EU.  
    • Companies should explore supply-chain options that could potentially alleviate the CBAM burden for goods which may only be stored or further processed within the EU prior to re-export. 
  • Elements to consider in procurement terms: 
    • How do these reporting requirements translate into which suppliers' businesses must ask for new information? 
    • How can businesses leverage existing supply contracts to acquire the newly needed information?
    • Should businesses rethink information-related clauses in supply contracts, and if so, which ones?
  • To what extent can existing ESG data be repurposed/leveraged for CBAM reporting purposes?
  • What taxes, charges, and levies qualify as a carbon price, and how should they be reported? 
• Set up a reporting system in conformity with the CBAM rules.
• Considering the way CBAM will be taxed as well as its reporting obligations, companies should, however, take into careful consideration the compliance costs that will result from their reporting obligations.
• Design and implement a cost-minimisation strategy, taking into account both legal and technical perspectives.
• Monitor regulatory developments (notably regarding carbon pricing) in the jurisdictions of interest, ensuring adaptability to changing circumstances with optimum foresight. 

The implementing regulation contains complex rules, and it may be advisable to seek assistance to ensure your reports are timely and correctly filed. Please reach out to any of your local Baker contacts, and we can help you understanding and complying with CBAM.

1  ‘carbon price’ means the monetary amount paid in a third country, under a carbon emissions reduction scheme, in the form of a tax, levy, or fee or in the form of emission allowances under a greenhouse gas emissions trading system, calculated on greenhouse gases covered by such a measure, and released during the production of goods.

2  For steel goods, the identification number of the specific steel mill where a particular batch of raw materials was produced, where known.