The European Union’s Carbon Border Adjustment Mechanism (CBAM) began its so-called ‘definitive regime’ phase on 1st January this year, meaning the tariff mechanism has moved from a reporting obligation to a real-world cost for companies importing carbon-intensive goods into the EU.
Why this matters now: This means that reporting quality and embedded emissions data are now cost-control issues, not just compliance tasks. CBAM will have a direct impact on the cost of importing carbon-intensive goods into the EU, focusing business minds on corporate carbon exposure in Europe and around the world.
The start of the definitive regime has already caused wobbles in the agriculture sector, triggering opposition from farmers across Europe due to worries over increased costs for fertilisers.
Reminder: As it stands, the CBAM means EU-based importers must pay a charge linked to the carbon content of goods brought into the bloc. Currently it includes iron and steel, aluminium, cement, fertilisers, hydrogen and electricity, but is set to be expanded in future to cover other imports.
Purpose: The goal of the CBAM is to prevent ‘carbon leakage’ by equalising the cost of producing carbon-intensive goods inside and outside the EU. In other words, it protects EU-based producers from competitive distortions linked to imports of goods produced outside Europe where carbon prices are lower or non-existent. The CBAM is also intended to encourage countries outside Europe to develop their own carbon pricing policies, as a way to exempt their exports from the CBAM charge.
Prices: The CBAM works by requiring importers of covered goods to buy CBAM certificates which they must surrender annually to match the carbon content of imported materials. CBAM certificate prices are linked to the prevailing price of carbon allowances under the EU Emissions Trading System (EU ETS), in order to level the carbon price within and outside the EU.
Obligations: As well as a legal requirement to buy and surrender CBAM certificates, the measure also requires companies to get to grips with reporting data on embedded CO2 all along their global supply chains. This can be difficult, and failure to provide this data can increase costs. That’s because importing companies could be made to use default values for carbon content established by the European Commission which may have higher carbon values than their actual imports. Now that we are in the full implementation phase, non-compliance carries the risk of fines, or even criminal charges in the case of evasion or fraud. This makes it all the more important to report credible and verifiable CO2 data all along the supply chain.
Iron and steel dominate: In the first reporting window (1st to 6th January), iron and steel imports made up 98% of CBAM imports declared, according to the European Commission, highlighting Europe’s reliance on imported iron and steel.
Wobbles over fertilisers: Within days of the CBAM’s live phase going into effect, the measure had already proved controversial. Following pressure from France and Italy, the EU’s Commissioner for Trade and Economic Security, Maros Sefcovic, said the EC might consider the feasibility of making fertilisers temporarily exempt from the CBAM.
The EU’s CBAM regulation includes provisions that allow products to be made exempt if continuing to include them would risk causing severe harm to the EU’s internal market. This could be done through a delegated act: a non-legislative act adopted by the European Commission that adds to or amends an existing piece of legislation.
The resulting uncertainty surrounding possible exemptions reportedly caused problems in the fertiliser market because of fresh doubts over the policy and therefore import costs. Time will tell whether the EC makes any changes to the CBAM’s sectoral scope, but this stands as an example of how unexpected policy uncertainty can disrupt markets and hamper trading.
We can expect focus on the CBAM and its impacts on international trade to increase over time, as the full costs are being brought in over a phased time period which culminates in full implementation by 2034. This corresponds to a gradual withdrawal of free carbon allowances for industrial sectors under the EU ETS.
