On 1st October 2023 the EU launched the first Carbon Border Adjustment Mechanism (CBAM) globally, which requires EU importers to report and from January 2026 comply with carbon pricing on emissions embedded in certain products.
The Mechanism is part of a comprehensive package of regulations under the EU Green Deal, which aims to reduce the bloc's GHG emissions by 62% by 2030 in EU Emissions Trading Scheme (ETS) covered sectors.
The CBAM applies to selected raw materials and manufactured products, distinguished by CN-Code (listed in Annex I).
Sector-specific obligations currently apply:
In addition, downstream products from the iron, steel and aluminium sectors (e.g. tanks and drums, screws and bolts) will be included. Complex goods, i.e. goods which have been subject to further processing, will be considered for inclusion throughout the reporting period up until 2026.
Non-EU electricity imports may be exempt from the CBAM until 2030, provided the country of origin demonstrates equivalent ambitions for decarbonisation.
More clarity regarding the treatment of electricity under the CBAM awaits.
The intention is for the CBAM to expand over time to cover a wider range of goods and include all sectors covered by the EU ETS by 2030.
Reports will need to be submitted by the CBAM Declarant containing information about the product type, amounts of goods imported (MWh or tonnes), and embedded emissions and manufacturing installation. During the transitional period, monitoring and reporting requirements are required every quarter.
When the full CBAM comes into force, CBAM Declarants will need to purchase CBAM Certificates equal to the amount of GHG emissions embedded in the relevant goods they imported during the last calendar year.
Sale of physical CBAM certificates launches on 1st February 2027, where the CBAM price will correspond to the average auction price for EU ETS allowances (EUA) of a defined reference period.
The exact process for how CBAM certificates will be sold will be announced in due course. General conditions are:
- Importers will be required to hold a mandatory balance at the end of each quarter equivalent to at least 50% of their CBAM requirement to that date.
- Where goods have already been subject to a carbon price in a foreign country, through a tax or emissions trading system, importers may be able to claim a discount on the liability to surrender CBAM Certificates.
- Excess certificates held in an account will be invalidated in November if the operator has not applied for a repurchase [up to 50% of the verified imported CO2 emissions] by their national authority.
All transactions, including the purchase and transfer of CBAM certificates, will be hosted on the CBAM registry and certificates stored in the declarant's CBAM certificate account.
The CBAM obligation to report emissions and surrender certificates lies with the legal importer, or their nominated representative.
The entity that has been authorised as a “CBAM Declarant” with an EU member state authority where the import occurs will be registered by the National Authority in a central EU CBAM registry.
This will require substantial administrative efforts between the exporter and importer to agree on assumed CBAM responsibilities throughout the import process.
Contact us to learn more about the complexities and effective risk management solutions.
Penalties during the transitional period apply for failure to submit or correct erroneous CBAM reports. The penalty will be between €10 and €50, decided on a case-by-case basis by the CBAM authority and subject to an entity’s compliance record.
Surrendering insufficient CBAM certificates in the payable period from 2026, will result in a penalty matched to fines under the EU ETS regulations. This would be €100 per non-surrendered certificate/tonne CO2 in addition to having to satisfy the initial obligation.
To date, EU ETS sectors at risk of international competition receive free EU Allowances (EUAs) as well as energy price compensation to mitigate any international disadvantage created by EU ETS carbon costs. The introduction of CBAM aims to create a level playing field between EU domestic products and imports and enable the gradual removal of
free allocations (Figure 1).
Exemptions to imports apply for all EU ETS-linked markets and linked electricity markets. Iceland, Norway, Liechtenstein and Switzerland are also exempt.
The EU CBAM is the first of its kind, but other jurisdictions have announced similar measures, including the UK. Stay updated on the progress of the UK CBAM here or contact us to receive the dedicated briefing.
Several online training resources have been made available by the EU Commission, including webinars, tutorials, and in-depth guidance by sector. Contact us to find out how to assess and monitor your CBAM obligation.
Unlike the wider EU ETS allowance market, CBAM Certificates cannot be traded between importers or on a wider market.
Any certificates which are not used in the compliance year can be refunded (up to a limit of one-third of the total purchased) back to the issuing authority or banked into the following scheme year, but would be cancelled if not used or refunded within this timeframe.
However, since the price of CBAM certificates is directly linked to EU Allowance (EUA) prices (see figure 2), importers who want early carbon price certainty could purchase EU Allowances as a hedge against future CBAM certificate costs. As you can see from the chart below EUA prices
continue to experience a large volatility based on a variety of fundamental drivers.
CFP Energy can help importers understand the impact of CBAM on their business and put in place solutions to help manage future CBAM Costs.