22 May 2023 Final regulations published for new EU Carbon Border Adjustment Mechanism (CBAM) and EU Emission Trading System revisions; CBAM transition period begins 1 October 2023
On 16 May 2023, a significant milestone was passed as legal regulations for European Union Emission Trading System (EU ETS) reform and the new EU Carbon Border Adjustment Mechanism (CBAM) were published in the Official Journal of the EU. The EU's "Fit for 55" legislative package, which was initially announced in July 2021 and includes the new CBAM and ETS reform, is viewed as a key enabler for helping Europe reduce emissions at least 55% by 2030 (from 1990 levels). These targets are set out in the European Climate Law and are part of the wider European Green Deal strategy to achieve climate neutrality by 2050. A transitional period for CBAM will begin 1 October 2023 and extend through 2025, during which time quarterly emissions reporting will be required. Affected businesses will need to get ready to comply with new compliance and reporting requirements starting later this year and begin to assess the medium- to long-term process and cost implications. The EU CBAM is a climate measure that aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic (EU) production that is subject to carbon costs under the EU ETS. While the EU ETS applies to installations based in the EU and to certain production processes and activities (and will be extended further, as detailed below), CBAM will apply to certain goods imported into the EU.
This product list has significantly increased compared to initial draft versions of the regulation; for example, downstream products are now included, not just raw and semi-finished materials. Therefore, the list will apply to a larger number of businesses. Political discussions seem to favor extending CBAM further by 2030, to cover all product categories that are subject to the EU ETS if these products were manufactured in the EU. This would include polymers, diverse chemicals, mineral oil products, paper and pulp, among other categories. Between 1 October 2023 and 31 December 2025, transitional provisions will apply. Quarterly emissions reporting will be required and purchasing CBAM certificates will be optional. Importers (customs declarants, indirect representatives) will be required to quarterly report embedded emissions in goods imported during that quarter of the calendar year, detailing direct and indirect emissions as well as any carbon price effectively paid in a third country. Notably, from 31 December 2024, importers must have "authorized CBAM declarant" status to qualify for the import of in-scope goods. Under new CBAM rules, importers are required to report total verified greenhouse gas (GHG) emissions embedded in goods imported in a given calendar year. Following the transitional period (at the end of 2025), the financial impact of CBAM will gradually increase, with a progressive phase-in of CBAM costs until 2034. Carbon cost paid at origin can be deducted from the payable CBAM charges (provided that evidence of the cost can be made available). Payment of CBAM charges will be facilitated through the purchase and surrender of CBAM certificates, which will be priced at the weekly averages of EU ETS allowances auctions. During the calendar year, the importer must ensure that the number of CBAM certificates in its CBAM registry account at the end of each quarter corresponds to at least 80% of the embedded emissions in imported products since the beginning of the calendar year. The importer must surrender CBAM certificates in the exact number corresponding to emissions embedded in goods imported in the calendar year, in addition to submitting an annual CBAM declaration. CBAM charges correspond to embedded emissions in the named product categories, and the definition of embedded emissions to be declared has been extended to indirect emissions. The declaration of emissions can be made based on actual emissions, which need to be determined based on a schema provided by the EU regulators, although the details are not yet finalized. Implementing legal acts containing additional details are likely to be published in Summer 2023. If actual emissions are declared, they must be accredited by independent verifiers. If no actual emissions are available, standard "default" values will be used that reflect average emissions for a certain product manufactured in a specific country or region. If no reliable data to determine these standard values is available, the EU Commission will determine default values based on the worst-performing EU installations. Further guidance is expected in the implementing acts in Summer 2023. CBAM will not apply to goods of nonpreferential origin in Switzerland, Liechtenstein, Iceland and Norway. There are only a small number of exemptions, including for low-value consignments up to €150 and certain military imports. Examples of circumvention practices have been slightly extended in what is now an open catalogue of practices that may consist of, but are not limited to:
One significant change to the current system is the phase-out of free allowances. Effectively, from 2026 to 2034, the free allowances granted to EU manufacturers will fade on a progressive curve, consequently increasing the cost of manufacturing for businesses if processes remain the same.
It is important to note there will be no export rebates or refunds of carbon payments. All revenues generated by the carbon market will be spent on climate and energy-related projects.
CBAM and the reform of the EU ETS will affect businesses both in the EU and across the globe, from an operational perspective and in terms of strategic decision-making. Impacts may be either direct or indirect. A holistic approach across the value chain and supply chain is recommended. EU-based operators subject to EU ETS must plan for increasing carbon costs if usage of conventional fuels is continued. Consequently, increased costs may affect competition on the EU and global market for emission-heavy businesses. With the new EU ETS II, the price of conventional fuels will further increase and may catalyze the need for transformation in this sector. It is worth noting the EU and the EU Member States nationally provide large, diverse programs of grants and incentives to support businesses in the transition. Additional revenues from the carbon market will bring further funding opportunities as part of the EU Innovation Fund, especially for businesses investing in innovative low-carbon technologies. With the transition phase for CBAM beginning on 1 October 2023, preparing for the new quarterly reporting obligations will require immediate action. Importantly, EU operators and non-EU manufacturers and traders alike will need to consider CBAM requirements.
Furthermore, from a strategic point of view, businesses should assess the potential financial impact of CBAM and EU ETS based on the current supply chain and take appropriate mitigation actions where possible. Other anticipated changes in the energy and electricity tax areas (e.g., revisions to the Energy Taxation Directive) should also be taken into consideration. Activities could involve rethinking supply chain structures, sourcing strategies, merger and acquisition activity, production planning, and investment planning to achieve technical improvements to reduce embedded emissions in imported products. It will be important for businesses to monitor developments, especially as the implementing acts are expected in Summer 2023.
Document ID: 2023-0925 | |
