On 10 May 2023, the European Union adopted its Carbon Border Adjustment Mechanism (“CBAM” or the “CBAM Regulation”), which entered into force on 17 May 2023 and will apply from 1 October 2023.1 The EU's CBAM is a first-of-its-kind border adjustment mechanism for CO2 emissions, which aims to ensure that the cost of those emissions is adequately reflected in the price of product imported into the EU.
The essence of the CBAM has remained unchanged from the Political Agreement that was already reached in December 2022.2 There will be a transitional period through 31 December 2025, during which reporting obligations will apply, but no CBAM certificates will have to be surrendered.
Reminder: CBAM's product scope, country-exclusions and importer's obligations
The CBAM is centered around a requirement to surrender “CBAM certificates” that reflect the carbon price of the embedded emissions in the covered products that are imported into the European Union. As such, CBAM works in parallel with the EU Emissions Trading Scheme (“EU ETS”) by applying a carbon price to imported goods that is equivalent to the carbon price applied to goods manufactured in the European Union as a result of the EU ETS.
While the Commission had initially proposed that the mechanism should apply to imports of cement, electricity, certain fertilisers, and certain iron, steel and aluminium products, the Council and the EP have extended the scope to also include hydrogen, some “precursors” (such as cathode active materials) and a limited number of so-called “downstream products” such as such as screws and bolts and similar articles of iron or steel (together “the covered products”). For a limited group of iron and steel products, certain aluminium products, and for hydrogen, CBAM certificates will have to cover only the direct emissions for the moment. By reference to the Harmonized System ("HS") nomenclature, the product scope of the CBAM is as follows:
- HS Chapter 25 – Cement: certain items of Headings 2507 and 2523
- HS Chapter 27 – Electricity: electrical energy of HS 2716
- HS Chapter 28 – Fertilisers and Hydrogen: certain items of Headings 2804, 2808, 2814, 2834, 3102, and 3105
- HS Chapter 72 – Iron and Steel: except certain products of Heading 7202
- HS Chapter 73 – Articles of Iron and Steel: certain items of Headings 7301, 7302, 7303, 7304, 7305, 7306, 7307, 7308, 7309, 7310, 7311, 7318, and 7326
- HS Chapter 76 – Aluminium: certain items of Headings 7601, 7603, 7604, 7605, 7606, 7607, 7608, 7609, 7610, 7611, 7612, 7613, 7614, and 7616
The product scope may be extended by 2030 to encompass all products covered by the EU ETS, which would mean the inclusion of polymers, diverse chemicals, mineral oil products, paper, and pulp, among other categories.
The mechanism will apply to imports from non-EU countries, except countries covered by the EU ETS or equivalent agreements (i.e. Iceland, Liechtenstein, Norway and Switzerland). In addition, in order to enhance the compatibility with the European Union’s obligations in the World Trade Organization (“WTO”), third countries will be able to apply for exclusions from the CBAM, subject to the condition that the country has an equivalent domestic carbon pricing mechanism.
Only “authorised declarants" will be permitted to import covered products. The declarants will need to report on the direct and indirect (under certain “well-circumscribed” conditions, to be announced) embedded emissions in the imported covered products on an annual basis, and will need to surrender a corresponding amount of CBAM certificates.
Enforcement, penalties, and circumvention
Once the transition period is over, penalties will apply for failure to surrender the required amount of CBAM certificates. However, penalties will also apply in case of the introduction of goods into the European Union whilst failing to comply with other CBAM obligations, including reporting obligations during the transitional period. The CBAM Regulation also targets potential circumvention practices, which are defined as "change[s] in the pattern of trade in goods, which stem[s] from a practice, process or work, for which there is insufficient due cause or economic justification other than avoiding, wholly or partially, any of the obligations" of the CBAM. The slight modification of goods to make them fall under different customs classification ("CN") codes, and the artificial splitting of shipments into consignments with an intrinsic value of less than €150, are mentioned as examples of such circumvention practices.
Key implementation dates
CBAM Regulation sets the following key compliance dates for companies that will be impacted by CBAM:
- Second or Third Quarter of 2023: publication of:
- proposed delegated acts by the European Commission to establish rules on the inclusion of countries on the list of countries to which the CBAM Regulation will not apply, the granting of accreditation status of verifiers, the sale of CBAM certificates, and the adoption of lists of “slightly modified products” that are used to circumvent the CBAM Regulation.
- proposed Implementing Acts by the European Commission to establish rules on, inter alia, the application of CBAM in the Exclusive Economic Zone (“EEZ”) of EU Member States, methods on the calculation of embedded emissions, application forms for the status of “authorized CBAM declarant”, reporting formats on embedded emissions and the carbon price paid in the country of exportation, the application of the methodology by which the price of CBAM certificates shall be calculated as the average of the closing prices of EU ETS allowances on the common auction platform, and the requirements for the reporting obligations that will apply during the transition period.
The publication of the proposals will be followed by a consultation during which stakeholders can provide input.
- 1 October 2023: application of the CBAM Regulation, starting with a transitional period until 31 December 2025, during which the “reporting obligations” apply
- 31 January 2024: Deadline to submit first CBAM Report (for Q4 2023)
- 1 January 2026: End of transition period
- 31 January 2026: Deadline to submit last CBAM Report (for Q4 2025)
- 31 May 2027: Deadline to submit first CBAM Declaration (for 2026, i.e., the preceding calendar year)
The CBAM Regulation will apply as of 1 October 2023. The precise legal requirements arising from the CBAM Regulation will become more clear with the publication of the Commission's proposed delegated and implementing acts. We will publish additional updates on specific aspects of the CBAM Regulation, such as the methodologies for calculating emissions, the record-keeping requirements, rules on circumvention and penalties in case of non-compliance in the upcoming months.
Mayer Brown has a wealth of experience in advising not just on emissions trading but also on the policy and regulatory aspects of the EU ETS. This, together with our leading trade practice, positions us well to advise on the intricacies of the proposed CBAM.
1 Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism, OJ L 130, 16.5.2023, p. 52–104. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2023.130.01.0052.01.ENG&toc=OJ%3AL%3A2023%3A130%3ATOC.
2 See our 20 December 2022 Legal Update, EU Agrees on CBAM and ETS Reform.