The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a carbon pricing tool to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the European Union (EU) and to encourage cleaner industrial production in non-EU countries.
CBAM is one of the components of the EU Green Deal, which aims to reduce the EU’s net greenhouse gas (GHG) emissions by at least 55% by 2030. As the EU implements stringent climate policies to keep up with its climate ambition, many non-EU countries are lagging in rolling out climate policies. There is a risk of ‘carbon leakage’ where companies based in the EU move their carbon-intensive production to countries with less stringent climate policies, or EU products are substituted by more carbon-intensive imports.
To combat this risk, CBAM charges importers a carbon tax based on the amount of CO2 emitted while producing carbon-intensive goods. In the first phase of CBAM, six carbon-intensive sectors identified at the most significant risk of carbon leakage are:
- Iron and steel
But does that mean other sectors are safe from CBAM? The answer is no. By 2030, CBAM is expected to cover all product groups under the EU Emissions Trading System (ETS), including more downstream products and other products at risk of carbon leakage, such as petroleum products and synthetic rubber.
How does CBAM impact businesses?
During the transitional phase from 1 October 2023 to 31 December 2025, importers are required to submit quarterly reports on the amount of GHG emissions embedded in their imports (direct and indirect emissions) without making any financial payments or adjustments. The first reporting period is ending on 31 January 2024.
Starting 1 January 2026, the permanent system enters into force, and importers must declare each year (before 31 May) the quantity of goods imported into the EU in the preceding year and their embedded GHG. If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.
Importers also need to surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in Euro per tonne of CO2 emitted. The EU ETS price has fluctuated between 80 and 100 euros per tonne of CO2 for the past six months. In the last three years, the price of CO2 has risen significantly, recording a historical 550% increase from 16 euros per tonne of CO2 in early 2020.
The phasing-in of CBAM will take place in parallel with the phasing-out of free allocation under the EU ETS from 2026 to 2034. This means that CBAM will only apply to the emissions that exceed the free allowances under the EU ETS based on a specific industry in a particular year.
Based on the above reporting obligations and carbon price outlook, businesses will be impacted in the following ways:
Additional reporting compliance
Besides the existing organisational ESG and sustainability reporting requirements, businesses need to be prepared for product GHG reporting or product carbon footprint reporting. Businesses may need to develop internal processes and deploy IT systems to track emissions from production, calculate product carbon footprint and generate reports for CBAM submission.
Increased import cost
When the permanent systems take effect in 2026, businesses must be financially prepared for the increased import cost through the carbon tax. Now is a good opportunity for businesses to assess their product carbon footprint and start planning and acting on full-scale decarbonisation of their operations. The capital expenditure for full-scale decarbonisation might be expensive, but businesses need to look into the return they will obtain in the long-term.
Competition with low-carbon product
High-carbon products will lose their price competitiveness to low-carbon products with the introduction of carbon tax. Businesses need to relook into their marketing strategy. However, commercial opportunities arise for low-carbon or green products, and businesses that become ‘greener’ will gain the first mover advantage.
What do business leaders need to do?
The introduction of CBAM can be depressing to many, especially small and medium enterprises (SMEs). With the challenging global environment and moderate economic growth, businesses are encouraged to take the following steps to ease the pain:
- Talk to a trusted sustainability or GHG expert to gain clarity and understand what the opportunities lying ahead;
- Assess product carbon footprint using GHG calculations methodology that meets CBAM requirements;
- Be compliant with the new rules to ensure an undisrupted flow of goods and avoid penalty; and
- Decarbonise products through smart energy management systems, renewable energy, green procurement policy, and other decarbonisation strategies.
To sustain the business in this complex world, business leaders must consistently look inward and focus on taking small steps. There will be more and more rules and regulations governing ESG, sustainability and climate change in the near future, creating more confusion. Instead of trying to keep up with these ever-changing regulations, business leaders must focus on sustainable, innovative solutions that can transform your business.
The closest certification that fulfils the requirements of CBAM is ISO 14067:2018 Greenhouse Gases – Carbon Footprint of Products.
ISO 14067:2018 helps calculate a product’s carbon footprint based on the product’s life cycle. The standard provides detailed GHG classification and requirements of a product life cycle. The analysis and information are valuable for companies to make responsible decisions for GHG emissions, reduction and removals.
Learn more about ISO 14067:2018 Greenhouse Gases – Carbon Footprint of Products
BBC helps businesses reduce carbon emissions by providing knowledge and direction in applying ISO 14067:2018, a standard that focuses on estimating and reporting the carbon footprint of products. BBC assists in carrying out life cycle analysis, creating plans for reducing carbon footprints, and helping to prepare product carbon footprint reports. Book your free 30-minute discovery call and talk to our expert.
BBC Academy Workshop: ESG and Sustainability
This workshop examines the fundamentals of ESG and sustainability, reporting, stakeholder engagement, and rising global trends like the Carbon Border Adjustment Mechanism (CBAM). This workshop is designed for businesses and experienced and inexperienced sustainability to navigate ESG and create a high-impact ESG programme in their organisations.