Understanding CBAM: A Comprehensive Guide for European Importers of Goods

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a policy tool introduced by the European Union (EU) to prevent carbon leakage. Carbon leakage occurs when companies move production to countries with less stringent climate policies, undermining EU efforts to reduce greenhouse gas emissions. CBAM addresses this by imposing a carbon price on imports of specific goods into the EU, ensuring that imported products are subject to the same carbon costs as those produced within the EU.  EU manufacturers and service providers will be subject to the EU Emissions Trading System II (EU ETS II), which introduces, as of 2027, a carbon price on certain goods and services produced and delivered in the EU.

Why is CBAM Critical to Companies Operating in Europe?

CBAM is essential for companies in Europe as it levels the playing field between domestic products and imports.

Pricing carbon emissions associated with imported goods incentivizes global producers to adopt greener practices. This mechanism supports the EU’s broader climate goals under the European Green Deal and helps companies align with increasingly stringent environmental, social, and governance (ESG) standards, which are becoming critical for market competitiveness and investor relations. It also provides a level playing field between EU and non-EU suppliers of CBAM goods.

Who is Impacted by CBAM?

CBAM impacts various stakeholders in the supply chain, including:

EU Importers: Companies importing goods in the EU covered by CBAM (such as iron, steel, aluminum, cement, fertilizers, hydrogen, and electricity) are directly responsible for complying with reporting and carbon cost obligations.

Logistics Service Providers (LSPs): While not directly responsible for compliance, LSPs play a crucial role in facilitating data collection and ensuring that necessary documentation accompanies imported goods. If they act as direct or indirect customs representative, they can also take ownership of the quarterly CBAM reporting.

Shippers and Retailers: These entities must be aware of CBAM requirements as they will need to ensure their supply chains are compliant, potentially affecting sourcing decisions and contractual agreements with suppliers.

Manufacturers: Those exporting to the EU need to track and report their carbon emissions, as their products will be subject to CBAM upon entry into the EU market.

Timeline for Implementation of CBAM

Transitional Phase (2023-2025): From October 1, 2023, importers are required to report on the carbon emissions embedded in their goods.  Up to June 30th, 2024, EU importers are allowed to use default carbon emissions values as provided by the EU for reporting. After July 1^st,2024, all imported CBAM goods must be reported against each manufacturer’s actual direct and indirect emissions data.   The default carbon emission values can only be used for 20% of the CBAM-reported imports. There is no requirement for EU importers to purchase carbon certificates. The Transitional phase aims to learn, adjust regulations, and build up actual emissions data from manufacturers.

In 2025, CBAM will be evaluated. The list of CBAM-related products will most likely be extended to other goods and services. All EU importers will need EU approval for CBAM imports.

Definitive Phase (Post-2025): As of 2026, all imports of carbon for CBAM-related products need to be compensated by the EU importers through the purchase of carbon certificates that will have a by the EU regulated price per ton of carbon.

It is important to note that by Q3 2024, businesses must transition to calculation- or measurement-based methodologies rather than relying on default values, ensuring more accurate and detailed reporting. This is an important milestone for all parties involved. EU importers are liable to get the actual emission data from their suppliers and manufacturers for all CBAM products and need to prove their efforts on this to the National Competent Authorities (NCA), such as e.g. the Dutch Emissions Authority (NEA). In case of non-compliance, fines can be applied by the NCA.

Nine Key Steps for Achieving Compliance as an EU importer of CBAM goods

There are several things that companies can do to ensure they remain compliant and avoid costly penalties and other consequences.

Register as a CBAM Declarant: Register with the NCA in the EU member state where the company operates. This registration is mandatory for all importers of CBAM-covered goods. The registration process involves providing company details and ensuring all relevant personnel are aware of their reporting obligations​ (Taxation and Customs Union)​​ (Taxation and Customs Union)​. Importers can also outsource the CBAM reporting to specialized (customs) representatives. In the case of a so-called direct representation, the representative acts on behalf and in the name of the importer. This is possible when the importer is registered in an EU member state. In the case that the importer is not registered in an EU member state, an indirect representative in the EU is required to do the CBAM reporting. A limited number of companies offer these services, however, given potential risk and liability issues.

Understand the Scope of CBAM for your products: Identify if your imported goods fall under CBAM regulations. CBAM currently applies to goods such as hydrogen, electricity, aluminum, iron, steel, ferroalloys, and cement. The EU has published a list of CN codes (based on the HS codes as used for customs and import) for products that apply to CBAM. Companies must stay updated on any expansions of this list​ (Taxation and Customs Union)​​ (EUR-Lex)​. It is expected that this list will expand over time.

Internal Training: Educate relevant departments (customs, procurement, finance) about CBAM requirements and reporting procedures. It is often advisable to conduct training sessions for customs, procurement, finance, and sustainability teams to ensure all relevant departments understand their roles in data collection, reporting, and compliance​ (Taxation and Customs Union)​​ (EUR-Lex)​. Use external advice if required.

Data Collection for Reporting: Collaborate with customs agents and suppliers to collect necessary data on imported goods’ origin, quantity, and carbon emissions.  This includes direct and indirect emissions during production that need to be provided by the supplier.

Supplier Engagement: Ensure suppliers provide accurate emissions data. In our experience, companies often underestimate what this entails. It is critical that a company establishes communication channels with suppliers to collect detailed emissions information. You can use  tools provided by the European Commission to facilitate this process​ (Taxation and Customs Union)​​ (EU Trade)

Collecting emissions data from suppliers is a big challenge for EU importers for several reasons:

• The data needs to be collected at the production source, the so-called installation. Often, multiple layers between the importer and the installation, like traders, make data collection complex and time-consuming.
• Suppliers and installations don’t always have the required data or knowledge of how to collect them. Often, processes to measure the data need to be implemented. Alternative data sources are only temporarily allowed until the end of 2024.  Supplier training and coaching are often required.
• In case parts of supplier data are missing, EU importers can work with the suppliers and support external carbon accounting specialists to use assumptions and benchmark data to get the required calculated emissions for CBAM reporting.
• In some cases, suppliers do not want to disclose the data for confidentiality or competitive reasons.
• When many suppliers and/or installations are involved, the governance process to collect data is complex and time-consuming. Language barriers, particularly with Asian supplier’s ad installations, cause constraints.

We recommend updating contracts to include CBAM compliance clauses, ensuring that suppliers understand and adhere to the reporting requirements​ (Taxation and Customs Union)​​ (Taxation and Customs Union)​. 

The support of external carbon accounting specialists or consultants is highly recommended to set up the process of supplier data collection and emissions calculations

Quarterly Reporting: report your imports of CBAM within 30 days after each quarter. This can be done in the EU CBAM Registry. A web portal developed and managed by the European Committee. There are IT systems on the market that simplify the portal reporting and save time. Reporting can be done by the EU importer or a direct or indirect (customs) representative.

Monitor Developments: Stay informed about regulatory updates and adjust compliance strategies accordingly. To do this, you need to regularly review updates from the European Commission and other relevant bodies or partner with a service provider who can support you and ensure you stay up to date. You can also subscribe to ESG-Alerts, a free SPARQ360 service or reach out to a specialist. If suppliers or installations change or production processes are updated, the direct and indirect emissions used for reporting must also be updated.

Leverage Compliance for ESG Reporting: CBAM compliance requires substantial work to get set up. Yet once the processes and technologies are in place, the data being collected can be leveraged to enhance a company’s overall ESG reporting and strategy. This improves transparency, attracts sustainability-focused investors, can support recruitment efforts for new talent, and – through integration with supply chain optimization – reduce costs.

Penalties for Non-Compliance and Benefits of Compliance

Financial Penalties

Fines for Misreporting or Non-Reporting: Companies that fail to accurately report the carbon emissions embedded in their imported goods or do not submit reports on time will face substantial fines. These fines range from €10 to €50 per tonne of CO2 equivalent that is either misreported or not reported at all​ (Taxation and Customs Union)​​ (Taxation and Customs Union)​​ (EU Trade)​.

Calculation and Escalation: The fines are calculated based on the amount of emissions that were incorrectly reported or omitted. This means that larger quantities of unreported or misreported emissions will result in higher penalties. Additionally, repeated non-compliance or severe breaches may lead to escalating fines and more severe enforcement actions​ (Taxation and Customs Union)​​ (Taxation and Customs Union)​.

Best effort Obligation: The NCAs are responsible for national governance and application of corrective actions and fines. An important tradeoff for the judgment of the NCA is the obligation for the best effort for the EU importer. The importer must prove they made the best effort to get the data for CBAM reporting, including supplier data collection on direct and indirect emissions. An audit trail of this is highly recommended.

Legal and Administrative Penalties

Suspension of Import Rights: Persistent non-compliance can lead to administrative actions such as the suspension of the company’s right to import goods covered by CBAM. This measure is intended to enforce compliance and ensure that only companies adhering to the rules can participate in the EU market​ (EUR-Lex)​.

Potential Legal Actions: In cases of serious violations, legal actions may be taken against the non-compliant company. This could involve litigation, further increasing the financial burden and potentially leading to restrictions on the company’s operations within the EU​ (Taxation and Customs Union)​​ (EUR-Lex)​.

Reputational Damage

Impact on Business Relationships: Non-compliance with CBAM can severely damage a company’s reputation. It may affect relationships with stakeholders, including customers, investors, and business partners who are increasingly prioritizing sustainability and compliance with environmental regulations​ (Taxation and Customs Union)​.

Market Competitiveness: Companies found in violation of CBAM regulations might lose their competitive edge. In an era where ESG (Environmental, Social, and Governance) criteria are crucial, non-compliance signals poor governance and environmental stewardship, which can deter investors and customers​ (EU Trade)​.

Benefits of Compliance

Leveraging Data for ESG Reporting: Compliance with CBAM can enhance a company’s ESG reporting. The detailed emissions data collected can be used to improve transparency and demonstrate a commitment to sustainability, potentially attracting environmentally conscious investors and customers​ (Taxation and Customs Union)​.

Market Access and Competitive Advantage: By complying with CBAM, companies can ensure uninterrupted access to the EU market. Moreover, demonstrating compliance can be a competitive advantage, positioning the company as a leader in sustainability and responsible business practices​ (Taxation and Customs Union)​​ (EU Trade)​.

Cost Savings and Efficiency: Engaging in accurate emissions reporting and reduction efforts can lead to long-term cost savings through more efficient operations and supply chain optimizations. This not only helps in compliance but also contributes to the company’s overall financial health​ (EUR-Lex)​.  It can also lead to reviewing the supplier network and considering nearshoring or changing to EU-based suppliers to avoid future carbon import taxes on CBAM goods.

Key Takeaways

CBAM is a pivotal regulation for companies operating in Europe, aiming to curb carbon leakage, create a level playing field with EU and non-EU suppliers, and promote global environmental responsibility. By understanding the mechanism, adhering to reporting requirements, and leveraging compliance for broader ESG goals, companies can avoid penalties and gain a competitive edge in a market increasingly focused on sustainability.

The transitional phase from 2023 –205 is set up to get the reporting system in place and gather emission data for the definitive phase from 2026, when carbon certificates need to be purchased by EU importers to pay a carbon price for the imported tons of carbon. It is in the best interest of EU importers to have a sustainable process and system in place to gather rate suppliers for reporting and reduce the importance of carbon as much as possible. This will reduce costs, increase reputation, and avoid fines.

Given the complexity of the program, we recommend working with CBAM subject matter experts to assess your individual situation and support the implementation of a sustainable CBAM reporting and supplier engagement solution.

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