Greenhouse gas emissions represent a serious issue that the European Union began addressing more than 20 years ago by adopting the Emissions Trading System (EU ETS). This system, based on the principle ’pay as you pollute’, limits the total amount of emissions and allows companies to trade allowances. Companies that achieve savings in emissions can sell their surplus allowances to those needing additional permits, thereby incentivizing investments in clean technologies. At the same time, emissions remain within the overall cap, merely redistributing how much each company is allowed to emit.
However, the system has its shortcomings. Companies have often relocated production to countries outside the EU without stringent emission reduction measures, thus bypassing restrictions and reintroducing emissions into the Union through imported products, jeopardizing global climate goals.
In 2022, an agreement was reached on the Carbon Border Adjustment Mechanism (CBAM) regulation. This regulation aims to prevent so-called carbon leakage from countries outside the European Union and address shortcomings in the EU ETS.
CBAM is an integral part of the Fit for 55 package, which aims to reduce the European Union’s net greenhouse gas emissions by at least 55 percent by 2030.
Principles on Which CBAM Is Based
The European Union imports many products from non-member countries, which is particularly significant for companies outside the EU as it enables them to expand their market reach and maintain competitiveness. However, to achieve global climate goals, the EU has introduced measures designed to motivate companies from these countries to transition to clean energy and technologies.
CBAM is a tool that sets a price on carbon dioxide emissions generated while producing carbon-intensive goods. For instance, if a company outside the EU wants to export its products to the Union, it must pay for the carbon dioxide emissions embedded in its products. These embedded emissions refer to all emissions produced during the entire manufacturing process, including transportation. The cleaner the production process, the lower the carbon adjustment cost.
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Transition Phase
CBAM did not immediately go into full effect to enable industries to transition to cleaner technologies and energy more smoothly and considerately. A transitional period provides industries ample time to adapt to the new rules and obligations and develop the necessary infrastructure to implement the Mechanism effectively.
The transitional phase began on October 1, 2023, with the first reporting period for importers ending on January 31, 2024. During this period, CBAM applies to import specific products identified as having the highest risk of carbon leakage, including cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen. It is important to note that during the transition period, importers are not required to purchase and surrender CBAM certificates. Their sole obligation is to report greenhouse gas emissions, including direct and indirect emissions embedded in the products they import.
Until the end of 2024, companies can choose one of three reporting methods for their products’ emissions: the EU Methodology (new EU rules), the Equivalent Method (three options), or Default Values (until July 2024). However, from 2025 onward, companies reporting on product emissions will be required to use the EU Methodology, which mandates precise emissions calculations according to EU rules.
If a product contains components for which obtaining accurate emissions data is challenging (complex products), estimating emissions (default values) is allowed but only for up to 20 percent of the product’s total emissions. The remaining emissions must be accurately calculated. Another new feature starting in 2025 is that plant operators outside the EU will be able to share emissions data via the CBAM portal instead of sending it individually to each importer as they have done previously.
Lastly, starting in 2025, companies wishing to import products covered by CBAM regulations will be able to obtain the status of an Authorized CBAM Declarant by submitting an application through the CBAM registry. Their application will be reviewed by the competent authority in the EU country where they are registered.
Prepared by Katarina Vuinac
The story was published in the Energy portal Magazine RESPONSIBLE BUSINESS
