In 2023, the European Union entered the Carbon Border Adjustment Mechanism (CBAM) into regulation. This requires any companies importing carbon-intensive goods into the EU to disclose the carbon emissions from manufacturing the products they import (including emissions from manufacturers outside of the EU).
Since the CBAM was announced, the EU has created and shared lots of documents which explain what the CBAM is, the penalties for inaction, and guidance on completing the CBAM submission. However, practically implementing these requirements is a whole different story and seems to get even more confusing with each document released.
Keep reading to get an overview of what the CBAM is, how you might be impacted, and what you actually need to do!
What is the Carbon Border Adjustment Mechanism and why does it exist?
The EU ETS is a cap and trade system which essentially makes polluters pay for their GHG emissions. Polluters are granted a certain number of emission allowances per year (called a “cap”), and the cap is reduced year-over-year to support the EU’s green transition. If they have extra allowances, they can sell them on the EU carbon market (this is the “trade” portion of “cap and trade”).
Although the EU ETS puts financial penalties on emissions generated within the EU, there is currently nothing preventing companies from relocating their production of carbon-intensive goods to avoid paying for expensive EU ETS allowances. This leads to carbon leakage where products imported into the EU may have been manufactured in countries with less stringent regulations and taxes on GHG emission generation.
Essentially, the CBAM levels the playing field for all manufacturers and places a fair price on carbon for anyone operating in the EU.
Who needs to worry about the Carbon Border Adjustment Mechanism?
You may be thinking: “I don’t operate in the EU so I’m all good, right?” – not quite.
Companies that import goods worth anything more than €150 into the EU need to account for the embedded emissions of their products (i.e. emissions from the production process before they get them). This means that they need to ask their suppliers to also complete a CBAM submission. Let’s look at an automotive manufacturer example:
- Companies like Ford, Stellantis, and General Motors import vehicles or vehicle components into the EU
- To produce these vehicles, they source parts from suppliers specializing in fasteners, sheet metal stamping, suspension systems, etc.
- To comply with the CBAM requirements, these large automotive manufacturers are reaching out to their supply chain to complete a CBAM submission (which will need to be done by October 31, 2024 at the latest – more on this down below)
Although we used automotive manufacturers as an example here, this applies to anyone who manufactures certain carbon-intensive products (known as CBAM goods). These are cement, iron & steel, aluminum, fertilizers, electricity, and hydrogen.
CBAM in action: What do you need to do?
Starting August 1st, 2024, estimates are no longer accepted by the CBAM, and EU importers will be directly engaging with their supply chains to get first-hand climate data. The next quarterly report is due on October 31, 2024 so if you get a request for a CBAM submission, make sure you’re ready!
Here are some steps you can take to make sure you’re prepared:
Take stock of your operations – do you import anything into the EU directly?
If so, check if your products are part of the CBAM goods list and make sure you have the emissions data ready to go for your submission. If you need support, get in touch with the team at Carbonhound so we can help you avoid any financial penalties.
If you don’t import into the EU directly, but manufacture any of these CBAM goods, keep an eye out for any requests from your customers that mention CBAM.
Reminder: the next quarterly report is due October 31, 2024 – so these requests will be coming in any time now (if you haven’t already received them)!
If completing these quarterly CBAM reports sounds like a hassle, give us a shout! Carbonhound offers pre-formatted templates for your CBAM submission, helping you meet your quarterly expectations while saving you time and money.
Financial Impacts of the Carbon Border Adjustment Mechanism
Starting in January 2026, importers of CBAM goods into the EU will need to pay for the carbon emissions of the products they import through “CBAM certificates”. These certificates will cost importers the weekly average price of EU ETS allowances (currently sitting at around €70 per tonne of carbon dioxide equivalent – July 16, 2024).
If you directly import into the EU and do not complete the CBAM disclosure, you currently face fines of €10-50 per metric tonne of undisclosed carbon dioxide equivalent. However, starting January 1, 2026 this price goes up to:
- €100 per metric tonne of carbon dioxide equivalent for incorrect/ incomplete reports (and will continue to increase with the European index of consumer prices)
- €300-500 per metric tonne of carbon dioxide equivalent for companies importing CBAM goods into the EU that are not registered as authorized declarants
Importers know that the only way to avoid financial penalties is by buying from suppliers that will have the data to complete a CBAM submission.
Don’t risk losing business by being caught unprepared for the CBAM!
Because of CBAM, the price of carbon-intensive goods for your EU customer is going up.
Reducing the carbon impact of your operations will make your products more desirable for EU customers, winning you more deals!
Summary of the Carbon Border Adjustment Mechanism (CBAM)
The Carbon Border Adjustment Mechanism is a way to level the playing field for anyone importing carbon-intensive goods into the EU, regardless of the laws or carbon taxes in the country where they were manufactured.
If you directly import at least €150 of iron, steel, aluminum, cement, fertilizers, electricity, or hydrogen into the EU, you must complete quarterly CBAM submissions. Failure to disclose leads to significant financial penalties per tonne of carbon dioxide equivalent imported.
If one of your customers directly imports these goods into the EU, you will likely need to complete a quarterly CBAM submission – keep an eye out for these requests in the coming weeks! If you can’t or don’t submit this supplier CBAM submission, you risk losing customers who need this data for their submissions.
The next quarterly report is due October 31, 2024 – reach out to the team at Carbonhound at hello@carbonhound.com to help you prepare your CBAM submission by automating your climate data and using our pre-formatted CBAM template.
Stay tuned for Carbonhound’s CBAM Submission Guide where we will give you step-by-step instructions for completing it! Fill out the form below to be the first to get your hands on this guide, and as always, give us a shout at hello@carbonhound.com if you have any questions!
