Carbon Border Adjustment Mechanism („CBAM“) brings new obligations to importers of defined goods
On 17 May 2023, Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism („CBAM“) entered into force. The CBAM (also referred to as „carbon duty“) will enter into application in its transitional phase on 1 October 2023. Regulation must be applied in its entirety across the EU.
The CBAM will initially apply to imports of certain goods and selected precursors in some of the most carbon-intensive sectors: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.
CBAM should be phased in gradually over time, with the aim of allowing for a careful, predictable and proportionate transition for EU and non-EU businesses, as well as for public authorities. Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023. During this transitional period, it will be limited to reporting obligations with the aim to collect data.
A CBAM report on the goods imported during the respective quarter of a calendar year and the emissions embedded in these imports will have to be submitted by each importer or the indirect customs representative for the given quarter of a calendar year, no later than one month after the end of that quarter. The deadline for submission of the first CBAM report will be 31 January 2024. The last CBAM report, which is the report to be submitted for the last quarter of 2025, should be submitted by 31 January 2026.
The rules and requirements for the reporting of emissions under CBAM will be further specified in an implementing act to be adopted by the European Commission after consulting the CBAM Committee, made up of experts from EU Member States.
During the transitional period, no financial payments or adjustments will be made. This pilot period is to serve as a learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive mechanism.
The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime.
A review of the CBAM's functioning during its transitional phase will be concluded before the entry into force of the definitive system. At the same time, the product scope will be reviewed to assess the feasibility of including other goods and a timetable setting out their gradual inclusion should be presented.
The definitive system
From 1 January 2026, the full CBAM will kick in. The customs authorities should not allow the importation of goods by any person other than an authorised CBAM declarant. The authorised CBAM declarants will have to submit annually a declaration of the embedded emissions in the goods imported into the customs territory of the EU and would surrender the number of CBAM certificates which correspond to those declared emissions. The first CBAM declaration, in respect of the calendar year 2026, should be submitted by 31 May 2027.
The price of CBAM certificates will be calculated for each calendar week as the average of the closing prices of EU ETS allowances on the auction platform expressed in EUR/ tonne of CO2 emitted, in accordance with the procedures laid down in a separate regulation.
For those calendar weeks in which no auctions are scheduled on the auction platform, the price of CBAM certificates shall be the average of the closing prices of EU ETS allowances of the last week in which auctions on the auction platform took place.
The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026-2034.
It falls to the EU member states to impose penalties for infringements of the mentioned Regulation and they should ensure that such penalties are enforced.
More specifically, the penalty amount for the failure of an authorised CBAM declarant to surrender CBAM certificates should be identical to the excess emissions penalty set out in the Directive establishing a scheme for greenhouse gas emission allowance trading and increased pursuant to the relevant provision of that Directive, according to rules applicable in the year of importation of the goods.
However, where the goods have been introduced into the EU by a person other than an authorised CBAM declarant without complying with the obligations under the Regulation, the amount of those penalties should be higher in order to be effective, proportionate and dissuasive.
When imposing the penalties, the competent authorities should take into account in particular the duration, gravity, scope, intentional nature and repetition of such non-compliance and the level of cooperation of the person with the competent authority. According to the Regulation, an amount from three to five times the penalty referred to above should be concerned. Such penalty would be applicable in the year of introduction of the goods, for each CBAM certificate that the person has not surrendered.
An effective, proportionate and dissuasive penalty should be imposed on the importer or the indirect customs representative even during the transitional period, if he failed to comply with the reporting obligation or if the submitted CBAM report is incomplete or incorrect and he has not taken the necessary steps to correct it.
The imposition of penalties under this Regulation is without prejudice to penalties that may be imposed under EU or national law for the infringement of other relevant obligations, in particular those related to customs rules.
Adoption of delegated and implementing acts under this Regulation is awaited in the forthcoming months.
In view of the approaching start of application of the transitional phase of the new mechanism, it is important that businesses operating in the sectors concerned become familiar with the new rules in good time and prepare for the upcoming changes.