An Overview of CBAM: why, what, when and how?

The CBAM will have an extended reach regarding GHG emissions and sectors, affecting a large cohort of European industry, also global operations and supply chains. Scope 1 and 2 GHG emissions related to the production processes of goods over which the corporate has direct control are included. Also, it considers Scope 3 related to both upstream and downstream emissions. In the first iteration, EU companies importing iron and steel, fertilizers, aluminium, and cement sectors will be included in CBAM. However, its sectorial scope could be extended.

This policy instrument will also impact beyond the EU corporates falling under the CBAM regulation. It effectively imposes a levy on EU imports, depending on the emission content of production and the difference between the EU ETS price and any carbon price paid in the production country. CBAM-covered goods will become more expensive unless businesses reduce their greenhouse gas emissions. In a nutshell, there will be growing interest in products that emit fewer emissions, and the export competitiveness of several countries in the Asia-Pacific region could be impacted.

The transition phase of CBAM kicks off in October 2023 and will run to 31 December 2025. During this period, CBAM will exist without financial adjustment and only reporting obligations, in order to reduce risks of disruptive impacts on trade.

From 1 January 2026 onwards, the CBAM including the financial adjustment for imported goods will be fully applied.

During the transition phase, corporates will have to determine and document all direct and some indirect emissions arising from the production of imported goods, as well as providing a quarterly CBAM report detailing the volume of imported goods, their embedded emissions, and the price of carbon paid in the country of production (if any).

From 1 January 2026, corporates will in addition have to ensure they are registered under the CBAM scheme, ensure third party verification of their reporting via an accredited partner and purchase and retire CBAM certificates to cover the reported and verified direct and indirect emissions. This process will be undertaken on an annual reporting cycle for goods imported in the previous calendar year and the corresponding number of CBAM certificates purchased and retired accordingly.

The pricing of CBAM allowances will be tied to the EU emissions allowances, whereby corporates will buy CBAM certificates from EU Member States at pricing corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules.

Explicit carbon pricing policies in countries of origin such as carbon taxes or national Emissions Trading Schemes, will reduce the CBAM adjustment payment. These obligations paid in the exporting country would be directly deducted from the CBAM pricing obligations.