What is the CBAM?
The EU Carbon Border Adjustment Mechanism (the “CBAM”)
was established by the CBAM Regulation (EU) 2023/956 (the
“CBAM Regulation”), which came into force in May 2023. It
is a carbon tariff system introduced as part of the EU’s goal
to reduce greenhouse emissions by at least 55 % by 2030.
While the CBAM is not the first and only mechanism aimed at
reducing emissions, it has been specifically designed to respond to
carbon leakage, which occurs when companies looking to cut costs
shift production to countries with less strict climate policies.
This results in EU products being replaced with third-country ones
that are cheaper but also more carbon-intensive.
Is it already happening?
The CBAM currently applies within its transitional phase, which
will last until 2026. The transitional phase is supposed to be a
“smooth roll-out”, a learning period for all, giving
companies an opportunity to slowly adapt to the challenges and
changes that will be required later on.
During the transitional phase, importers are only obliged to
report on the emissions embedded in the imported products. These
reports are submitted quarterly by either the importer or its
indirect customs representative and contain the amount of both
direct and indirect greenhouse gas emissions resulting from the
production of goods imported in the last quarter.
There are, therefore, no financial obligations whatsoever in
this first transitional period, except for the fines that the
importers could suffer if they do not submit a report or submit an
inaccurate report. The penalties are set by each EU Member State
and range from EUR 10 to 50 per ton of unreported or incorrectly
reported emissions.
The last CBAM report should be submitted by 31 January 2026,
marking the beginning of the definitive CBAM regime. Under the
definitive regime, goods covered by the CBAM regime can only be
imported in the EU by companies that are authorised CBAM
declarants, which means registered with a national competent
authority in their Member State to buy CBAM
certificates.1 Those companies will submit annual
reports on the emissions embedded in the products they imported and
will therefore need to present a corresponding number of CBAM
certificates to cover for those emissions. Failure to present CBAM
certificates by 31 May each year (starting from 2027) is subject to
a fine of EUR 100 for each ton of emitted CO2 for which the
certificates have not been presented.
Current product scope
The CBAM, at least in the transitional phase, covers seven
sectors where a notable risk of carbon leakage has been identified:
iron and steel, cement, fertilisers, aluminium, hydrogen and
electricity, as well as certain precursors and downstream products.
There is, however, a goal to further expand this scope by 2030,
which would greatly broaden the effect of the CBAM.
How are non-EU companies affected?
The CBAM is poised to have a significant overall impact on the
businesses of non-EU companies, since their relationships with EU
importers could take a substantial financial hit in those cases
where the carbon tax ends up being very high.
This leaves producers at an impasse with only two options:
- reducing emissions, which means investing into new,
environmentally friendly and more expensive technologies; or - exploring and resorting to new markets outside of the EU to
avoid these costs.
Next steps and room for challenge
Even though the CBAM is ostensibly designed to be compatible
with the WTO rules2, it could be claimed that it
represents a potential violation of multiple GATT principles,
notably the most favoured nation treatment, national treatment
and/or rules on tariff concessions. In fact, many countries have
already expressed concerns regarding the CBAM and have addressed
them before the WTO or other institutions.3 Therefore,
avenues such as lobbying and legal challenges are still open and
expected as a response to this mechanism.
In the meantime, companies operating in the affected sectors
should evaluate their options and carefully consider their
obligations under the CBAM Regulation. This includes setting up
calculation or reporting systems, preparing for the end of the
transitional period (becoming authorised declarants where
applicable) and especially engaging in management training and
educational activities. This is where legal teams will come into
play, carefully ensuring compliance with various aspects of this
mechanism within the company, all with much-needed help from
engineers and environmental policy specialists.
Ultimately, adapting and modifying local legislation can ease
the position of local producers at least insofar as the carbon
price already paid under local rules will be deducted from the
amount due under the CBAM. Otherwise, these new constraints could
potentially squeeze the producers from developing countries out of
the EU trade sphere.
Footnotes
1. A provisional list of NCAs per Member State is
available here: https://taxation-customs.ec.europa.eu/document/download/5595ce5b-9fd2-42f6-9908-ed6325338ffa_en?filename=20240220%20Updated%20provisional%20list%20of%20NCAs%20for%20CBAM.pdf.
2.
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#:~:text=The%20CBAM%20is%20designed%20to,lasts%20between%202023%20and%202026..
3. Concerns were expressed even within the EU. For
example, Poland officially challenged the CBAM before the CJEU in
2023. See
https://steelnews.biz/lawsuit-poland-calls-for-repeal-eu-cbam-ets-system/.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
#CBAM #Regulation #Effect #Balkan #Companies #Iron #Steel #Cement #Fertilisers #Aluminium #Hydrogen #Electricity #Sectors #Environmental #Law
