Carbon Border Adjustment Mechanism

What is CBAM

 CBAM stands for Carbon Border Adjustment Mechanism. In its generic form, this can apply to any shipment of goods or services across borders. The border can be of a country (like the UK) or an economic region (like the European Union). This is one of the several sustainability related regulation being introduced by developed countries or regions. CBAM is aimed at reducing or eliminating the carbon emissions from the production of goods and services.

These emissions are called the Scope 1 & 2 under the Green House Gas (GHG) protocol. CBAM aims to put a price on the scope 1 & 2 emissions. Putting a price to these emissions, incentivizes the production methods with zero or low emissions. This puts a penalty on the production methods with high GHG emissions. CBAM is not applicable on the Scope 3 emissions of the production of goods and services. As such CBAM excludes the carbon footprint of the raw materials, the capital equipment used for manufacturing and others.

Broadly, carbon border adjustments (interchangeably referred to as border carbon adjustments [BCAs]) would adjust the price of certain carbon-intensive goods to reflect the carbon output of their production processes. Carbon intensity refers to the emissions of carbon dioxide and other greenhouse gases throughout the production process of a product and per unit of production.

 Carbon Border Adjustments would adjust the price of certain carbon-intensive goods to reflect the carbon output of their production processes.

Where does CBAM Apply

 EU CBAM is a European regulation, which is part of the suite of regulations covered under the European Green Deal. As of now CBAM is applicable on import of certain goods into the European Union. As per the Brookings institute, The UK plans to implement a similar policy in 2027. Australia, Canada, and Turkey are exploring the option.

Which Materials does EU CBAM cover

 The EU CBAM applies mostly to basic materials and basic material goods. This can also be applied to some finished/downstream products. Initially EU CBAM will cover materials made from

• Aluminum,
• Cement,
• Electricity
• Fertilizers
• Hydrogen
• Iron
• Steel

As per the EU CBAM FAQ. "The CBAM Regulation applies to CN codes (Combined Nomenclature), which adds two digits to the HS code and is used as a commodity code for exports outside the EU."  A detailed list of materials covered under CBAM is made available in Annexure I to the CBAM regulation. These are called "CBAM Goods".

Please refer to link for the list of the CBAM regulation ANNNEXES Draft.pdf

Why EU CBAM?

 The EU is a global champion of sustainability and a fight against climate change. They launched the European Green Deal to help achieve meetings EU's ambitious target of to reduce GHG emission by 55% by 2030 (compared to 1990 levels) and becoming climate-neutral by 2050. In July 2021, the Commission made its Fit for 55 policy proposals to turn this ambition into reality, further establishing the EU as a global climate leader. The EU’s Carbon Border Adjustment Mechanism (CBAM) is one of the 55 policy proposals which has been enacted into law.

Currently the domestic producers of carbon intensive goods within the EU manufactures pay a price for each ton of carbon dioxide emitted. Companies would like to move their production outside the EU to avoid purchasing this EU carbon allowance. The EU is calling this 'carbon leakage'- - which means companies in EU moving the carbon intensive manufacturing processes to countries and jurisdictions with lax environmental laws. The EU CBAM primarily aims at tackling 'this carbon leakage'. The EU CBAM aims to provide a level playing for the domestic producers by imposing the carbon charges on imported goods.

As per the Columbia Center of Sustainable Investment,

The EU’s Carbon Border Adjustment Mechanism (CBAM) is the EU's tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.

When does EU CBAM Kick in 

• Transitional period (1 October 2023 to 31 December 2025): This is intended as a “learning phase”. In this phase CBAM importers are only required to report a set of data, including emissions embedded in their goods. There are charges applicable during this phase. During this phase the importers are required to make a submission on the embedded emissions of their imports on a quarterly basis. There might be penalties applicable in case non reporting of emission figures. For further details, please refer to the link.
• Definitive period

From 2026 to 2033, the importers will gradually be required to pay the prices for the embedded emissions for CBAM goods imported. The importers will have to do this by buying CBAM Certificates. The price of these certificates would be the same as weekly average auction price of EU ETS allowances expressed in €/tons of CO2 emitted. 100% payment for the embedded carbon will become applicable from 2034. For details, please refer to the link.

Definition of embedded emissions as per CBAM

• Direct emissions: Direct emissions are defined as the emissions coming from the operations to the produce the materials. This includes emissions from heating and cooling of the products in the production process. Any heat recovered during the process can be deducted. Detailed guidance is found in Section 6.7.2 of the FAQ document.
• Indirect emissions: As per CBAM these emissions come from production of electricity consumed during the production process. This needs to cover both the electricity produced on site or bought. These emissions can be calculated using emission factors published by the European Commission.
• Precursors: If the production process uses materials which are processes in an upstream process, the embedded emissions in these input materials also need to be captured. These emissions are called precursors. Simply put, this is the embedded emissions in the raw materials and can be received from the suppliers.

The key Jobs to be done for Complying with CBAM

The onus of reporting falls on the company importing the materials into the EU. The regulation defines them as "Reporting Declarant(s)". The reporting declarant must provide a ‘CBAM report’ on a quarterly basis, to the European Commission via the CBAM Transitional Registry, at the latest by the end of the month following the end of the quarter.

 CBAM Transitional Registry – Link for importers 

 The EU commission has created and empowered National Competent Authority (NCA) is the member states to enable these disclosures. Importers need to request access to the registry through these NCAs. The provisional list of the NCA can be found here.

Applying the 4C Sustainability Framework, the key jobs to be done to comply with CBAM are:

 Collect (Internal)

1. The list of CN codes of materials entering the European Union

Compute (Internal)

1. Review the list of CN codes against the list of materials included in the Annexure of CBAM regulation to identify the materials which need to comply with CBAM regulations
2. Identify the origins of the materials

Collect

1. List of shipments of CBAM goods due to enter the EU
2. List of facilities supplying the materials
3. The direct and the indirect emissions embedded in the materials entering the EU

Compute

1. Collate emission data from all suppliers contributing to shipment(s)
2. Update the quarterly log with the details of shipments and their emissions
3. Verify the details received from the suppliers (internal or external)

Communicate

1. File customs declaration as usual

Comply

1. Upload the emissions details in the CBAM registry on a quarterly basis
2. Review submission for any feedback from CBAM Registry

Reporting Declarants can be working with different upstream supply chains. In the case of reporting declarants importing the CBAM goods from their own facilities outside the EU, the Collect jobs is an internal one. They need to collect the emissions details from within the organisation.

For the reporting declarants, who have a mix of internal and/or external suppliers contributing to the shipment of CBAM goods, need to Collect the data from their suppliers. This can take significantly longer than the internal data collection. In this situation, the reporting declarants should also take extra efforts to verify the details received from their supplier(s).

Thanks for time and I hope this edition helps you understand the nuances of the complying with CBAM. This guide is for education purposes only. Please consult your subject matter experts across legal, customs and other teams for building and deploying your actual solution.

#CBAM #Sustainability #EU #Carbon # Emissions #SDGs #PractitionersGuide #Guide #GHGs