Carbon Border Adjustment Mechanism (CBAM)

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM), an advanced environmental policy instrument of the European Union, aims to create a level playing field for domestic and foreign producers by introducing equal carbon costs for imported and domestically produced goods. At the heart of the CBAM is the levying of an emissions price on certain products manufactured outside the EU to ensure that these goods reflect the same carbon prices as those borne by producers within the EU. This instrument is a direct response to the challenges of climate change and supports the EU’s ambitious target of reducing CO₂ emissions by 55% by 2030 compared to 1990 levels, as part of the “Fit for 55” package.

By internalizing the cost of CO₂ emissions from the production of certain goods outside the EU, CBAM works hand in hand with the European Emissions Trading System (EU ETS) – the heart of EU climate policy. It specifically addresses the risk of “carbon leakage”, i.e. the relocation of CO₂-intensive production processes to countries with less stringent emissions standards in order to avoid the strict EU regulations. The application of the CBAM not only creates fair competitive conditions, but also provides incentives for companies worldwide to reduce their CO₂ emissions.

Each EU Member State designates a competent authority to monitor the direct and indirect emissions associated with imported products. These emissions are paid for through the purchase of CBAM certificates, which is a transparent and effective method of ensuring compliance with environmental standards and promoting more sustainable production practices. With CBAM, the EU strengthens its commitment to climate protection and underlines its leading role in global environmental policy by ensuring the effectiveness of its emission reduction measures and at the same time driving forward the global sustainability agenda.

Classification in the European Green Deal

The EU Green Deal marks a turning point in European environmental and economic policy with the ambitious goal of making Europe the first climate-neutral continent by 2050. At the heart of this comprehensive plan is the decoupling of economic growth from resource use to ensure a sustainable future in which no person and no place is left behind. All players in society are called upon to make their contribution, from individuals to companies and governments.

A central component of the Green Deal is the EU taxonomy, which obliges companies to disclose the consistency of their revenue, capital expenditure (CapEx) and operating expenditure (OpEx) in relation to climate protection targets and adaptations. This mechanism aims to redirect financial flows into sustainable investments in order to reduce the ecological footprint of the economy. The Corporate Sustainability Reporting Directive (CSRD) complements these efforts by standardizing reporting requirements to ensure that companies present their sustainability performance in a transparent and comparable manner.

The carbon border adjustment mechanism (CBAM) was introduced to prevent the risk of carbon leakage, i.e. the relocation of CO₂-intensive production processes to countries with less stringent environmental standards._. This obliges EU companies to purchase CO₂ certificates for certain imported goods in order to ensure fair competitive conditions and at the same time promote global efforts in climate protection.

Another important step towards anchoring sustainability in the economy is the EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive, CSDDD), which is still in progress. This directive will oblige companies to make their due diligence obligations transparent with regard to suppliers and the entire supply chain in order to promote sustainable practices along their value chains.

In addition to these regulations that have already been implemented or are being planned, there are a number of other measures and directives that address specific sectors or issues, such as the battery regulation, deforestation-free supply chains and the ban on importing products from forced labor. These initiatives underline the EU’s comprehensive commitment to promoting sustainable development in all areas of the economy and society and form the basis for a greener, fairer and more resilient future for all.

Which goods are covered by CBAM and which emissions must be collected?

The goods covered by CBAM include:

– Iron, steel, aluminum and hydrogen: Direct emissions must be recorded here. Direct emissions refer to the greenhouse gases that result directly from the manufacturing processes of goods. These include not only the emissions that come directly from the production facilities and processes, but also those that arise from the generation of heat and cold that are consumed during the production of the goods. The decisive factor here is that the location of the heat or cold generation has no influence on the classification as direct emissions. This means that even if the heat or cold required for production is generated externally, the associated emissions count as direct emissions from the production process. This comprehensive approach ensures that all relevant emissions generated during the production of a product are recorded and included in the overall assessment of the environmental impact.

– Electricity, cement and fertilizers: For these products, both direct and indirect emissions must be taken into account, which requires a comprehensive consideration of the environmental impact associated with their production. Indirect emissions include those greenhouse gases that are produced during the generation of electricity consumed during the production of goods. In contrast to direct emissions, which come directly from the production processes, indirect emissions are generated elsewhere – namely where the electricity is produced. This means that when assessing the indirect emissions of a product, not only the emissions generated at the production site itself are considered, but also those caused by electricity generation, even if this takes place at a completely different location. This approach takes account of the fact that the electricity consumed is a significant factor in the environmental footprint of a production process and enables a more comprehensive assessment of the environmental footprint of goods.

In a transitional phase, the EU is also evaluating the possibility of extending the scope of CBAM to other goods, which could increase the impact of this mechanism on global climate protection. The definition of clear codes for the relevant products underlines the EU’s efforts to ensure transparent and comprehensible implementation of CBAM in order to make an effective contribution to combating climate change.

What is not covered by CBAM?

Certain goods and situations are not covered by the Carbon Border Adjustment Mechanism (CBAM). These exceptions were specifically defined in order to set practical limits for the use of CBAM and to reduce the administrative burden in certain cases. Here is an overview of the most important exceptions:

1. Low value goods: CBAM does not apply to shipments of goods whose individual value does not exceed €150. This regulation is based on Article 23 of Council Regulation (EC) No. 1186/2009. This exception is intended to exclude small consignments from CBAM taxation in order to reduce the administrative burden and complexity of the system.
2. Goods in the personal luggage of travelers: Goods that are carried by travelers from third countries in their personal luggage and also do not exceed a value of €150 are also exempt from CBAM. This regulation takes into account the practical handling of personal belongings and avoids unnecessary complications when entering the EU.
3. Military goods: Goods that are transported or used in the context of military activities are not covered by the CBAM regulations. This exception takes into account the special nature of military goods and operations.
4. Goods from certain countries and territories: CBAM does not apply to goods originating from Iceland, Liechtenstein, Norway and Switzerland. In addition, certain areas such as Büsingen, Helgoland, Livigno, Ceuta and Melilla are exempt from the CBAM provisions. These exceptions reflect existing trade agreements and special territorial agreements.

These exceptions make it clear that CBAM was specifically designed to effectively contribute to the reduction of greenhouse gas emissions on the one hand and to take into account practical considerations in international trade and personal travel on the other.

Special case of electricity

In the special case of electricity, the Carbon Border Adjustment Mechanism (CBAM) provides for a specific exemption for the import of electricity from third countries that meet certain strict criteria. This exemption concerns situations where a third country or territory has an electricity market closely linked to the Union’s internal electricity market through market coupling, but no technical solution exists to apply CBAM to electricity imports. To qualify for this exemption, the European Commission must determine that all of the following conditions are met:

1. Legal agreement: The third country or territory in question has concluded an agreement with the EU that stipulates the application of EU law in the electricity sector. This includes legislation to promote renewable energies and other provisions in the areas of energy, the environment and competition.
2. Implementation of EU electricity market regulations: The national legislation of the third country or territory reflects the essential provisions of the EU for the electricity market, including the promotion of renewable energy and market coupling of electricity markets.
3. Commitment to climate neutrality: The third country or territory has officially committed to achieving climate neutrality by 2050 and has developed and published a corresponding long-term strategy.
4. Alignment with EU climate policy: Significant progress has been made in aligning with EU climate policy, particularly with regard to CO₂ pricing for electricity generation. The aim is to introduce an emissions trading system that is to be completed by January 1, 2030 and sets a price for_{CO2 emissions} from electricity generation that is comparable to the EU ETS.
5. Prevention of indirect electricity imports: An effective system has been established to prevent electricity from other third countries that do not meet the specified requirements from being indirectly imported into the EU.

A third country or territory that fulfills all these conditions will be included in a corresponding list. The review of whether these conditions continue to be met is based on two reports that the third country or territory must submit by July 1, 2025 and December 31, 2027. The Commission will review these reports and compliance with the roadmap by December 31, 2025 and July 1, 2028, respectively, to ensure that the conditions continue to be met. This exemption reflects the EU’s efforts to reconcile its climate targets with the real conditions of international electricity trading and to take account of the technical and regulatory challenges.

Rights and obligations of CBAM applicants

• Claiming a CO₂ price: CBAM declarants have the right to claim a CO₂ price already paid in the country of origin of the goods against the payments due under CBAM. This is intended to avoid double taxation and create fair trading conditions.
• Authorization as a CBAM declarant: Every importer established in the EU must apply for the status of an authorized CBAM declarant by submitting an application via the CBAM register. The competent authority will then register the applicant in the CBAM register.
• Submission of a CBAM declaration: A CBAM declaration for the previous calendar year must be submitted via the CBAM register by May 31 of each year. The first declaration must therefore be submitted in 2027 for the year 2026.
• Verification of gray emissions: The gray emissions stated in the CBAM declaration must be verified by an accredited verifier. This guarantees the accuracy and reliability of the data provided.
• Record keeping and retention: CBAM applicants must keep detailed records of their emissions calculations so that they can be verified by an accredited auditor. These records and the audit report must be kept until the end of the fourth year following the submission of the CBAM declaration.

Specific requirements for electricity:

Imports of electricity must be accurately measured at each border and for periods of no more than one hour. No deduction for export or transit of electricity is possible within the same period. This regulation aims to increase the accuracy of CO₂ pricing for imported electricity.

Participation of plant operators in third countries

The participation of operators of installations in third countries in the European Union’s Carbon Border Adjustment Mechanism (CBAM) is a key aspect of this system, which aims to reduce global CO₂ emissions and create a level playing field. The possibility of registering in the CBAM register gives operators the opportunity to actively participate in this system and contribute to the transparency and efficiency of the mechanism. Here are the key aspects of participation:

Registration process:

• Data for registration: Operators must provide their name, address and contact details as well as the location of each installation with exact geographical coordinates and the main business activity of the installation.
• Validity: Registration in the CBAM register is valid for a period of five years.
• Option to delete: Operators have the right to request the deletion of their data from the register at any time.

Obligations of the operator:

• Determination of emissions: Operators are responsible for determining the emissions of their systems.
• Verification of emissions: The emissions determined must be verified by an accredited verifier to ensure their accuracy and compliance with the CBAM specifications.
• Retention of records: Both the test report and relevant records must be retained in accordance with CBAM requirements to allow for review if required.

Cooperation with CBAM applicants:

– Passing on information: Operators can pass on the verified emission information to CBAM notifiers. This enables notifiers to fulfill their own verification obligations more efficiently and ensures that issues reported under CBAM are accurate and transparent.

Who has to fulfill the reporting obligations?

A distinction is made between different scenarios with regard to responsibilities for compliance with reporting and financial obligations and the assumption of any penalties. These responsibilities vary depending on whether the importer is directly involved or whether a customs representative is involved. Here is an overview of the three main cases:

Case 1: No representation by others – own import

In this scenario, the person, company or organization imports the CBAM goods themselves. As a direct importer, it is fully responsible for:

• Reporting on imports,
• Ensuring compliance with financial obligations and
• The assumption of any penalties.

Case 2: Direct representation by a customs representative

In this case, a customs representative acts as a direct representative of the importer, whereby the following points apply:

• Reporting: The representative takes over the reporting, provided that the importer agrees to this.
• Financial obligations and penalties: These responsibilities remain with the importer, even if the agent takes over the reporting.

Case 3: Indirect representation by a customs representative

Here, a third party (the indirect representative) assumes complete responsibility for the import process, including:

• Reporting,
• Financial obligations and
• Penalties.

This constellation is particularly relevant for importers based outside the EU, as they must use an indirect representative. Importers based within the EU can also choose an indirect representative, but they have the right to refuse to take on the reporting and financial obligations. In such cases, responsibility remains with the importer.

Transitional arrangements and CBAM applicants

Regardless of the chosen form of representation, CBAM reports must be submitted during the transitional period. From 2026, it will be necessary to apply for the status of an authorized CBAM applicant in order to meet the new requirements and ensure continuous compliance.

What are CBAM certificates?

CBAM certificates are a central element of the European Union’s Carbon Border Adjustment Mechanism (CBAM), which aims to regulate greenhouse gas emissions from imported goods and thus contribute to a reduction in global CO₂ emissions. Here is a detailed look at how CBAM certificates work and what they mean:

Sales and administration

• Platform: CBAM allowances are sold by the member states via a central, common platform set up and managed by the European Commission.
• Price determination: The price of allowances is determined weekly as the average of the closing prices of EU Emissions Trading System (EU ETS) allowances on the auction platform, in accordance with the procedures described in Regulation (EU) No. 1031/2010. The fixed price will be publicly announced on the first working day of the following week.

Delivery and verification

• Annual submission: Authorized CBAM applicants must submit the number of CBAM allowances corresponding to the verified grey emissions of the previous year via the CBAM registry by 31 May of each year. The first surrender of these certificates will take place in 2027 for the year 2026.
• Account balance: It must be ensured at all times that sufficient CBAM certificates are available in the applicant’s account. In particular, at the end of each quarter, the number of certificates must cover at least 80% of the gray emissions calculated on the basis of standard values for all goods imported since the beginning of the year.

Flexibility and incentives

• Buyback: CBAM certificates purchased in excess can be bought back by the member state at the price originally paid. This offers companies a certain degree of flexibility in dealing with their emissions certificates.
• Price influence: The price of CBAM certificates depends, among other things, on the production process of the goods and the market price at the time of purchase. Driving forward low-carbon production processes can therefore have a positive impact on the price to be paid and promote the reduction of greenhouse gas emissions.

What sanctions are threatened?

The European Union has provided for specific sanctions to ensure compliance with the regulations and to ensure that all importers take their climate-related obligations seriously. Here are the main penalties for non-compliance with CBAM regulations:

If CBAM certificates are not surrendered:

Importers who fail to surrender the required number of CBAM certificates corresponding to the CO₂ emissions of their imported goods will face a penalty of at least €100 per tonne of CO₂ equivalent. This penalty corresponds to that laid down for exceeding emissions in accordance with Article 16(3) of Directive 2003/87/EC. This measure aims to create a strong financial deterrent against non-compliance with CBAM obligations and to emphasize the importance of companies’ responsibility for their CO₂ emissions.

When bringing goods into the EU customs territory without a valid CBAM authorization:

In the event that goods are brought into the customs territory of the EU without a valid CBAM authorization, a significantly harsher sanction is envisaged. The penalty for this violation can amount to three to five times the penalty for failure to surrender certificates. This significant sanction reflects the EU’s serious commitment to ensuring that all imported goods covered by CBAM regulations are properly declared and their emissions offset through the purchase of CBAM allowances.

How does the EU Commission intend to effectively prevent the circumvention of CBAM?

To prevent circumvention of the Carbon Border Adjustment Mechanism (CBAM), the European Commission has set out a series of measures and definitions to close potential loopholes. These measures aim to ensure that the CBAM Regulation is effectively implemented and that all imports that fall within its scope are properly recorded and regulated. Here are the key points that the EU is introducing to prevent circumvention practices:

Definition of circumvention practices

Circumvention practices are defined as changes in trading structures, procedures, processes or operations that have no reasonable objective reason or economic justification other than to evade, in whole or in part, the provisions of the CBAM Regulation. These practices include in particular

• Change in the classification of goods: Any modification of goods aimed at changing them so that they no longer fall under the relevant CN (Combined Nomenclature) codes of the Regulation, without changing the essential characteristics of those goods. This could be attempted in order to remove the goods from the scope of CBAM.
• Artificial splitting of consignments: Artificially splitting consignments into smaller partial consignments in order to fall below the €150 threshold is also an identified circumvention practice. This would be attempted in order to classify the goods as low-value shipments that are exempt from the CBAM scheme.

Measures against circumvention practices

The European Commission is relying on a package of measures to combat these and other potential circumvention practices:

• Strict monitoring and control: The establishment of monitoring mechanisms and close cooperation with Member States’ customs authorities will ensure that import practices are closely monitored and analyzed.
• Adaptation of the regulations: The Commission reserves the right to adapt the CBAM rules and the classification criteria in order to respond to and effectively prevent newly identified circumvention strategies.
• Cooperation at international level: The EU is also seeking increased cooperation with third countries to promote compliance with CBAM rules and prevent attempts to circumvent them.

Overview of the CBAM introduction process

Entry into force and transition phase

• Entry into force of the CBAM Regulation: October 2023.
• First quarterly reporting in the transition phase: Due by January 31, 2024 for the reporting period Q4/2023. The first two quarterly reports can be adjusted until July 2024.
• Last quarterly report in the transition phase: December 2025.
• Until quarterly report 3: Until June 30, 2024, reporting can be based on the EU method, estimated values or standard values. The EU will publish standard values for guidance at the end of 2023.

Review phase, registrations and “arming”

• Review phase and scope extension: In 2025, the collected data will be evaluated, which could include possible extensions of the scope and further specification of the methods.
• Registration as an approved CBAM applicant for the post-transitional phase: From January 1, 2025.
• Reporting: From January 1, 2025, reporting will be based on the EU method or, in exceptional cases, on standard values.
• “Arming” of the regulation: From January 1, 2026, the permanent system will come into force and payments for CBAM certificates will be due.
• CBAM declaration and submission of CBAM certificates: From 2026, a declaration for the previous calendar year must be submitted annually by May 31.

What do you need to do now?

To prepare effectively for the new regulation and ensure compliance, companies should take the following steps:

1. Define responsibilities: Determine who within your organization is responsible for fulfilling CBAM reporting obligations. Train these people accordingly so that they are familiar with the requirements and processes.
2. Create an implementation roadmap: Develop a detailed plan that includes the steps to implement CBAM in your organization. Involve all relevant stakeholders in this process to ensure a holistic approach.
3. Identify imports: Systematically record all imports of goods and electricity from non-EU countries. This includes a company-wide identification of all relevant imports.
4. Recognize CBAM-relevant goods: Identify among your imports those that fall under the CBAM regulation. This requires a precise analysis of the product categories and the associated CN codes.
5. Communication with suppliers: Contact the suppliers of CBAM-relevant goods. Find out about the production sites, the emissions associated with these goods and any existing_{CO2 compensation prices} in the country of origin.
6. Registration in the CBAM Registry: Register in the CBAM Transitional Registry. This is an essential step in order to fulfill your reporting obligations.
7. Compile data on goods subject to CBAM: Create a list of all goods subject to CBAM and determine the associated emission values. This information is required for reporting purposes.
8. Reporting in the transition phase: Submit your first report by January 31, 2024 and carry out quarterly reporting up to and including December 2025.
9. Include CBAM in strategic decisions: Consider CBAM charges in future award decisions and integrate CBAM into your commodity group strategies.
10. Intensify supplier management: Work closely with your suppliers to gather the necessary information and jointly develop strategies to reduce greenhouse gas emissions.

By preparing for CBAM early and strategically, your company can not only ensure compliance, but also contribute to global climate protection and potentially save costs by switching to more sustainable production methods and supply chains.

What needs to be done from 2026?

1. Contact the competent authority: Even if the competent authority in Germany has not yet been defined, keep yourself informed of developments and announcements. This enables you to react to new information in good time and to establish contact as soon as the authority is known.
2. Registration in the CBAM portal: Plan to register in the CBAM portal as of January 1, 2025. Early registration can ensure that you can take all the necessary steps for compliance in good time.
3. Calculation of emissions: Determine both the direct and indirect emissions of your imported goods and imported electricity. This is a fundamental step in determining the quantity of CBAM certificates to be purchased.
4. Check by a certified auditor: Commission a certified auditor to check your emission calculations. Confirmation by an external auditor is essential to ensure the accuracy of your data.
5. Purchase CBAM certificates: Organize the purchase of the necessary CBAM certificates to cover the emissions caused by your imported goods. The strategy for buying should be flexible in order to be able to react to price fluctuations.
6. Submission of the CBAM declaration: Prepare to submit your CBAM declaration by May 31 of each year for the issues calculated in the previous calendar year.

What needs to be done in the transition period until then?

During the transition phase of the Carbon Border Adjustment Mechanism (CBAM), companies importing goods into the European Union must provide detailed reporting. These reports must be submitted every quarter, at the latest one month after the end of the quarter. The aim is to create transparency about the CO₂ emissions associated with imports and to lay the foundations for the subsequent use of CBAM certificates. Here are the main contents that must be included in the CBAM reports for the transition period:

1. Total quantity of each commodity type: This includes the total quantity in megawatt hours for electricity and in tons for all other commodities. The data should be broken down according to the production facilities that manufacture the goods in the country of origin.
2. Actual total gray emissions: Reports must include total emissions in metric tons of CO₂ equivalent (CO₂e) per megawatt-hour for electricity or, for other commodities, per metric ton of each commodity type. Emissions can be calculated in accordance with:
   • The procedure described in Annex IV of the CBAM Regulation,
   • The calculation system valid in the country of origin of the goods,
   • reference values, which will be determined from January 1, 2025 by the EU method or, in exceptional cases, with default values.
3. Total indirect emissions: In addition to the direct emissions generated during the production of goods, indirect emissions must also be reported, such as those generated by the electricity required for production.
4. CO₂ price in the country of origin: The CO₂ price to be paid in the country of origin for the gray emissions associated with the imported goods must be specified. Any export refunds or other forms of compensation must be taken into account.

This detailed reporting should not only increase transparency, but also promote compliance with environmental standards and provide an incentive to reduce CO₂ emissions in global trade. Companies are therefore called upon to familiarize themselves with the requirements and to carefully collect and report the necessary data.

Consideration of possible adjustments:

Be prepared for possible adjustments to processes and the affected goods during the transition phase. A regular review of CBAM regulations and a proactive exchange with the competent authority are crucial to ensure that your company always complies with current requirements. JARO can provide you with information and support in this regard.

By planning and implementing these steps early on, your company can not only ensure compliance with the CBAM, but also proactively contribute to reducing global CO₂ emissions and potentially optimize its environmental impact and costs. JARO can provide your company with customized and optimal support for the implementation of CBAM. Get in touch with us.