Background

CBAM is intended to complement the EU Emissions Trading System (EU ETS) and ensure that imported goods are subject to the same emissions prices as products produced within the EU. With this, CBAM is aimed at preventing "carbon leakage," i.e., the relocation of greenhouse gas emissions from the EU to third countries. The EU ETS has been in place since 2005. It is the EU's central instrument to reduce greenhouse gas emissions. Under the EU ETS, the Member States allocate a certain quantity of emission allowances, which are distributed partly via auctions and partly for free. Over the years, the free allocation of EU ETS certificates to companies in energy-intensive sectors has been gradually reduced. This, however, created an increased risk of carbon leakage, whereby companies in certain sectors relocate their production to other countries with lower costs. As a result, the effectiveness of the EU measures to reduce emissions is jeopardized. CBAM is supposed to close this loophole. The new mechanism is set out in Regulation (EU) 2023/956 ("CBAM-Regulation"). CBAM will impose a carbon price on the import of certain goods produced outside the EU based on the associated carbon emissions, ultimately reducing global emissions and helping reach the targets of the Paris Climate Agreement as well as balancing out the competitive disadvantages of domestic companies who produce emission-intensive goods inside the EU.

In Germany, the competent authority for the application and enforcement of the CBAM-Regulation is the German Emissions Trading Authority (Deutsche Emissionshandelsstelle - DEHSt). The obligations under the CBAM-Regulations will be introduced gradually over the Transitional Phase, which will end on 31 December 2025.

From 1 January 2026, the free allocations will also be gradually reduced and proportionally offset by CBAM certificates until the existing EU Emission Trading System will be completely replaced with the CBAM by 2034.

CBAM will also account for cases where the importer has already paid a carbon price in a third country. The importer may then claim a reduction in the number of CBAM certificates to be surrendered in order to take into account the carbon price paid in the country of origin for the declared embedded emissions. This is intended to avoid a double burden and motivate third countries to introduce their own taxes and levies on emissions that they can collect themselves.

CBAM obligations and timeline

The first obligations apply since the start of the transitional period on 1 October 2023. This first phase ends on 31 December 2025. During this time, importers have the following obligations: 

• Registration in the provisional CBAM register is required.
• Embedded emissions in goods, i.e., emissions which are generated in the production process of the imported goods, must be calculated pursuant to the methods set out in the CBAM-Regulation.
• The calculated emissions must be documented and reported in a quarterly report.

In the transitional phase, no financial compensation is yet required by providing a corresponding quantity of CBAM allowances. For this period, the EU published an Implementing Regulation 2023/1773 and accompanying guidance on reporting requirements and methodology.

As of 1 January 2026, the permanent and complete CBAM system enters into force. From then on, importers will have to comply with extensive obligations as follows:

• Importers in the scope of the Regulation will have to apply for the status of authorized CBAM declarant. CBAM-goods may only be imported into the customs territory of the EU by authorized CBAM declarants.
• The calculated embedded emissions will need to be verified by an accredited auditor.
• CBAM-certificates will have to be purchased for a fee. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in EUR/ton of emissions emitted. CBAM declarants have to surrender a number of CBAM certificates that correspond to the embedded emissions declared in their reports.
• Importers must prepare and submit an annual CBAM declaration by 31 May of each calendar year for the emissions associated with the goods imported in the previous calendar year. The corresponding number of CBAM certificates must also be submitted by this deadline.

From 1 January 2026, the free allocations will also be gradually reduced and proportionally offset by CBAM certificates until the existing EU Emission Trading System will be completely replaced with the CBAM by 2034.

CBAM will also account for cases where the importer has already paid a carbon price in a third country. The importer may then claim a reduction in the number of CBAM certificates to be surrendered in order to take into account the carbon price paid in the country of origin for the declared embedded emissions. This is intended to avoid a double burden and motivate third countries to introduce their own taxes and levies on emissions that they can collect themselves.

Scope of application

The following goods are covered by the CBAM if they are imported from outside of the EU:

• Aluminum
• Iron and steel
• Fertilizers
• Electricity
• Cement
• Hydrogen

The specific goods can be identified by their code under the EU's Combined Nomenclature (CN-Code) listed in Annex I of the CBAM-Regulation. The importer must check and compare all imported goods against the CN-Codes in Annex I. By 2026, the EU Commission will examine whether the scope of the CBAM should be extended to include, for example, organic chemicals and polymers.

CBAM transitional reports

The first transitional CBAM report must be submitted by 31 January 2024 on the embedded emissions of the imported goods in the fourth quarter of 2023, encompassing the following key aspects: 

• Importers must state the total quantity of goods in megawatt hours (MWh) for electricity and in tonnes for other commodities. The importation date is determined by the "release to the market," indicating clearance by customs authorities.
• The report must provide a summary of embedded emissions in goods imported during the preceding quarter. This encompasses both direct and indirect emissions, along with any carbon price paid abroad. Importers are required to utilize the most recent embedded emissions data communicated to them by installation operators outside the EU.

Importers have to ensure the completeness of the imports list and other pertinent factors in the CBAM report. However, reliance on emissions data generated elsewhere is necessary. To facilitate this, importers are advised to incorporate a dedicated clause in their purchase contracts, obliging their contractual partners to submit the relevant emissions data.

The Implementing Regulation provides different reporting options for EU importers until the end of 2024:

1. Full Reporting: Adhering to the new EU methodology, considering actual embedded emissions.
2. Reporting based on an equivalent method (three options).
3. Default Values Reporting: Importers may utilize default values made available by the EU Commission on 22 December 2023 for the first three quarterly reports.

As of 1 January 2025, only the EU method will be accepted, and estimates (including default values) can only be used for complex goods if these estimations represent less than 20% of the total embedded emissions.

Summary and outlook

CBAM will be implemented in two phases, starting with the Transitional Phase without financial obligations and with simplified reporting obligations between October 2023 and the end of 2025. From 2026, importers will have to purchase and surrender CBAM certificates that correspond to the "grey" emissions of the imported goods, i.e., GHG emissions generated during the production of the covered imported goods will be priced. CBAM is supposed to minimize the risk of carbon leakage by ensuring equivalent carbon pricing for both imports and EU products and help reach the EU's climate goals.

CBAM will affect and apply to approximately 20,000 German companies that import certain goods from third countries. Companies importing CBAM-products must get comfortable with their new reporting obligations under the CBAM-Regulation and establish a process for collecting emissions data from their suppliers. The first reports are due on 31 January 2024 and must cover the last quarter of 2023.

But also companies not yet affected by the CBAM should follow new developments because the EU will review the product scope and likely expand the list of products covered by the CBAM in the future.

It is important to understand that in the time ahead, the cost of emissions will rise considerably by 2034 because the free allocation of emission allowances that are currently still practiced will expire.

As immediate next steps, EU importers, however, need to be aware of and prepare for the imminent deadline for the submission of the first report by 31 January 2024 to the competent EU Member State authority.