Importers into the EU of CBAM goods should be aware of their transitional reporting obligations under the new rules.
On 17 August 2023, the European Commission (Commission) adopted rules governing the implementation of the Carbon Border Adjustment Mechanism (CBAM) during its transitional phase, which begins on 1 October 2023 and runs until 31 December 2025. The Implementing Regulation (IR) outlines the transitional reporting obligations of importers into the EU of CBAM goods and the methodology for calculating emissions from the production of such goods.
The CBAM has been developed to address “carbon leakage”, in which companies may move carbon-intensive production to countries outside of the EU with less stringent climate policies, or in which EU products are replaced by more carbon-intensive products. In this respect, the CBAM will therefore replace the allocation of so-called “free allowances” under the EU’s Emissions Trading System (ETS), which is the EU’s current approach to addressing carbon leakage concerns and whereby EU operators receive a certain allocation of emissions allowances for free. The CBAM aims to put a fair price on the carbon emitted during the production of certain carbon-intensive goods entering the EU, and also to encourage cleaner industrial production in non-EU countries. The CBAM will seek to ensure the price of carbon imports is equivalent to the carbon price of domestic production. The introduction of the CBAM will therefore directly impact businesses trading into the EU in the sectors covered by the CBAM.
Scope of CBAM During Transition
During the transitional phase, the CBAM will initially apply to imports of certain goods and precursors whose production is carbon intensive and determined to be at most significant risk of carbon leakage, covering:
- iron and steel;
- electricity; and
Per the Commission, this phase aims to serve as a pilot period for all stakeholders, and to refine the methodology for the subsequent phase (i.e., after 31 December 2025). Following the transitional period, the full CBAM will be phased in, matching the timeline of the phase-out of free emissions under the EU ETS. For more information on the EU ETS and the CBAM, see this Latham blog post covering the provisional CBAM agreement.
Details of the Implementing Regulation
The IR outlines reporting obligations and information sought from EU importers of CBAM goods, and the provisional methodology for calculating embedded emissions released during the production process of CBAM goods.
Guidance for both non-EU operators of installations that will be impacted by the CBAM, and importers into the EU of products impacted by the CBAM, has been published covering the practical implementation of the new rules.
In the CBAM’s transitional phase, relevant importers will only be required to report on the emissions embedded in their imports subject to the mechanism, without paying any financial adjustment (as the charges under the CBAM will be known). Following this transitional period, from 1 January 2026, entities importing goods within the scope of the CBAM into the EU will be required to pay a levy on the embedded emissions of the goods, which will seek to ensure that goods produced outside the EU but imported into the EU are subject to the same carbon costs as EU producers would be subject to under the EU ETS. Per the Commission, limiting the obligations during the transitional period to reporting only will allow businesses to prepare in a predictable manner.
The final version of the IR followed a month-long consultation period on the draft version, during which stakeholders’ views were collected. The final regulation includes clarifications and differences from the draft version, including in regards to the use of default values, use of estimated values, and modification and verification of CBAM reports.
To assist with reporting, the Commission is developing dedicated information technology tools to help importers. Training materials, webinars, and tutorials will also be available to support businesses. Latham & Watkins will continue to monitor developments relating to the CBAM, and other climate-related European and global regulatory updates.