How the EU's new Carbon Border Adjustment Mechanism will affect importers of goods

The European Union is firmly committed to economic growth compatible with environmental protection and efforts to combat climate change, as is reflected in the European Green Deal and the climate neutrality objective set out in the "Objective 55" package of measures. This commitment on the part of the EU is nothing new, the instrument it has used for this purpose for several years being its greenhouse gas emissions trading scheme (EU ETS), which aims to ensure that products manufactured within the EU incorporate the cost of carbon.

However, the ambitious challenges taken on by the EU entail the risk of relocation of production to other countries with less demanding climate goals and of an increase in imports of more carbon-intensive products, i.e. what is known as the risk of carbon leakage.

To address this risk, Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a Carbon Border Adjustment Mechanism (CBAM) has been adopted. The CBAM aims to ensure that imported products are subject to a regime that applies carbon costs equivalent to those borne by products subject to the EU ETS.

In the drafting of the regulation, different options for implementing the CBAM were considered, including measures of a fiscal nature. However, in view of the practical difficulties posed by the latter, the option chosen has been an instrument that bears more similarity to emissions allowance schemes and requires importers to (i) obtain authorized declarant status prior to importing, (ii) declare the embedded emissions in the imported goods, (iii) ensure that these declared emissions are validated by an accredited verifier, and (iv) acquire and surrender the certificates corresponding to these emissions. The CBAM therefore introduces a carbon price for imported products, which is similar to the treatment given to products subject to the EU ETS, although there are differences between the two regimes.

The CBAM will apply to the goods listed in Annex I of the Regulation (corresponding to the cement, electricity, fertilizer, cast iron, iron and steel, aluminum and hydrogen sectors) originating in a third country, where such goods (or products processed from such goods under an inward processing regime) are imported into EU customs territory. However, goods coming from Iceland, Liechtenstein, Norway, Switzerland, Büsingen, Heligoland, Livigno, Ceuta and Melilla are excluded.

In the case of imported goods included in the aforementioned Annex I, the CBAM shall function as follows:

(a) Goods may only be imported into EU customs territory by persons who have been previously authorized for the purposes of the CBAM (authorized declarant), who will be entered in the CBAM Register and be assigned a unique CBAM account number. Customs authorities shall not allow the importation of goods by any person who is not an authorized declarant.

(b) Authorized declarants shall be required to present to the competent authority, by no later than May 31 of each year, a declaration corresponding to the preceding calendar year indicating: (i) the total quantity of each type of good imported, (ii) the embedded emissions in such goods (validated by an accredited verifier), (iii) the total number of CBAM certificates to be surrendered (taking into account the possible reduction in respect of the carbon price paid in a country of origin and the adjustment necessary in respect of emissions allowances allocated free of charge); and (iv) a copy of the verification report issued by an accredited verifier.

(c) The authorized declarant shall be required to surrender, within the same period, the CBAM certificates corresponding to the embedded emissions declared. Failure to surrender the certificates shall result in a penalty being imposed, although payment of the penalty shall not imply release from the obligation to surrender the outstanding certificates.

(d) Each Member State shall sell the CBAM certificates to the authorized declarants in its territory through a central common platform, at a price calculated by the European Commission based on the average of the closing prices of emission allowances on the common auction platform for each calendar week. If the authorized declarant has excess certificates, the Commission may buy them back at the same price at which they were purchased. On July 1 of each year, the Commission shall cancel (without any compensation) any CBAM certificates that were purchased during the year before the previous calendar year and that remain in the CBAM register account of the authorized declarant.

The timetable for compliance with these obligations envisages two phases. The provisions relating to the application for and granting of authorized declarant status, to the CBAM Registry, and to the assignment of the unique CBAM account number, shall apply as from December 31 2024. The obligation to declare embedded emissions and surrender CBAM certificates shall become enforceable for the first time in 2027 in respect of the year 2026. There will nevertheless be a transitional period (from October 1, 2023 through to December 31, 2025) during which the importer must submit a quarterly report on goods imported to the Commission, within one month of the end of each quarter in which imports have taken place.

In short, these are new obligations that importers will need to analyze carefully, since the very possibility of their continuing to import goods will depend on this.