Summary
Cut through the green tape
We don't push agendas. At Net Zero Compare, we cut through the hype and fear to deliver the straightforward facts you need for making informed decisions on green products and services. Whether motivated by compliance, customer demands, or a real passion for the environment, you’re welcome here. We provide reliable information—why you seek it is not our concern.
Details
Deep dive
Background
The Carbon Border Adjustment Mechanism (CBAM) is a carbon border tax devised by the European Union (EU) ultimately aimed at reducing carbon emissions. Established on 10 May 2023 and effective from 1 October 2023, the CBAM complements the EU's Emissions Trading System (ETS) which regulates emissions from industries within the EU by requiring companies to buy allowances for their carbon emissions thereby generating a financial incentive to reduce pollution. As the EU strengthens its climate commitments while some non-EU countries maintain less stringent environmental and climate policies, the CBAM aims to address the risk of carbon leakage which occurs when EU-based companies shift carbon-intensive production abroad to benefit from weaker regulations or when EU products are replaced by more carbon-intensive imports. Empirical analysis of annual carbon emissions data across countries from the Global Carbon Project (GCP) bears this out: between 1990-2018, while carbon emissions stayed flat or declined in many advanced economies which have introduced more stringent emissions reduction policies, emissions have been rising in many emerging market economies, especially in China and India. Carbon leakage ultimately weakens both EU and global climate efforts. The CBAM will help uphold the EU’s high climate ambitions and prevent climate action from being compromised by production moving to countries with more lenient policies. The CBAM is part of a package of policies and instruments.
Requirements of the CBAM
CBAM requires importers of certain high-emission goods to calculate and report the embedded greenhouse gas (GHG) emissions associated with their imported products. In the transitional phase of its implementation (1 October 2023 to 31 December 2025), the CBAM requires companies to deliver quarterly reports of direct and indirect emissions from production processes of imported products. The emission reports are to be calculated using methodologies specified in the CBAM implementing rules. Under the full implementation of the CBAM starting from 1 January 2026, the submission of emissions reports will be done annually (by 31 May for the previous year) rather than quarterly: the annual report for the year 2026 is due by 31 May 2027. Among other details, the annual submissions must contain verification statements concerning the reported emissions. Moreover, when fully operational, the CBAM requires importers to purchase CBAM certificates reflecting the carbon content of their goods, aligning the carbon costs of imported products with those produced within the EU. If a company can show that a carbon price has already been paid in the country of origin, they may receive a partial or full deduction from their CBAM obligations.
Which companies are affected?
The CBAM applies to carbon-intensive industries where carbon leakage is most likely to occur - i.e. companies in these industries have a stronger incentive to transfer production to countries with laxer climate regulations to avoid carbon costs in the EU. Initially, the mechanism covers six key products: iron and steel, cement, aluminum, fertilizers, hydrogen, and electricity. These industries were selected due to their high carbon emissions and significant share of world trade. The CBAM might subsequently be expanded to include other sectors. Companies within affected industries that export products to the EU must therefore put in place robust carbon accounting mechanisms to comply with CBAM rules. Moreover, the mechanism applies to EU-based importers, who must ensure that their supply chains provide accurate and verifiable carbon emissions data.
Penalties for noncompliance
Companies that fail to deliver complete and accurate emissions reports are liable to a financial penalty ranging between 10 and 50 euros per tonne of unreported emissions. If a CBAM report is missing, inaccurate, or incomplete, the National Competent Authority (NCA) which is responsible for checking the quality of CBAM reports may start a correction process, allowing companies the opportunity to address any errors. Penalties shall be imposed when the company fails to take the required steps to comply with its CBAM reporting obligations or when the CBAM report is inaccurate or incomplete, and the company fails to correct the errors identified by the NCA.
