The EU – CBAM Carbon Border Adjustment Mechanism regulation proposed to be implemented by Jan 2023 is a good reason for business to re-assess their current supply chain.

The European Commission is intending to release several carbon related initiatives and revised proposals in mid-July: Energy Taxation Directive, EU Emissions Trading system (EU ETS) and EU Carbon Border Adjustment Mechanism (CBAM). The three proposals are part of a wider “Fit for 55” package, which refers to the European Green Deal’s ambitious 2030 emissions reduction target of net 55% compared to 1990 levels. 

The Carbon Border Adjustment Mechanism (“CBAM”) is a new initiative and would impose a cost on certain carbon intensive goods entering the EU, helping not only to protect the competitiveness of companies currently producing similar goods within the EU but to internalise carbon costs as described above. The CBAM draft proposal documents were unofficially released in public domain in June 2021, which provides an insight into the legislators’ positions.  Final proposal is expected to be released by European Commission on 14th July 2021. The unofficial draft already gives an indication of possible impact on certain industries and supply chain.

Simplified overview of the potential impact *:

*Illustrative purpose only, does not reflect all the details

Key features based on unofficial draft:

  • Scope of imported goods: Aluminium, Cement, Electricity, Fertilizers, Iron and Steel.
  • Geographical scope: imports into the EU from rest of the world (excluding good originating from Iceland, Liechtenstein, Norway and Switzerland).
  • Importers must register with the CBAM authority and make an annual declaration based on the emissions associated with certain goods.
  • Obligation for importers into the EU on certain goods to purchase specific CBAM certificates (outside of the EU ETS).
  • Emissions for the imported goods will either be:
    • The actual “embedded” emissions covering direct and indirect emission associated with the production of the goods, confirmed by an “independent verifier”, or
    • Will be determined by reference to certain default values for that class of goods, based on the emissions of the 10% worst performers for a given production process.
  • Carbon price paid in the country of origin will be considered when calculating the total amount of CBAM certificates to be surrendered, subject to certain conditions.
  • Transitional provisions for goods from certain installations will provide some abatement from the imposition to the extent that such installations within the Customs Union would qualify for free allowances under the EU ETS.  This is because the aim of the scheme is to create a level playing field between the EU Customs Union and other territories.

Relevance for the EU business operating models

  • Although the regulation is yet to be implemented (expected 1st Jan 2023), CBAM exposes companies importing specified goods into the EU to additional cost and compliances. 
  • The cost and compliance will impact the procurement decisions as CBAM will impact the ultimate landed cost of such goods.
  • CBAM incentivizes the procurement of specified goods originating in the EU where carbon emission regulations are already in place.
  • The unofficial draft has not imposed any specific restriction on non-EU principal companies (e.g. Swiss or US) to import the specified goods however, CBAM compliance may create the need for addition services from the local entities, customs brokers or logistic service providers.

Immediate and short-term considerations for companies

Given this incumbent cost and compliance, we suggest some proactive steps:

  1. Evaluate whether CBAM impact your operations e.g. import of Aluminum is not limited to companies engaged in aluminum industry but also consumer and pharma sector using aluminum packaging (i.e. Aluminum foils, cans and packaging). Even if a company is not directly importing the specified products, cost from its EU supplier will increase.
  2. Quantify the exposure i.e. review the import data to quantify the value and number of transactions with specified goods. Quantify the impact of CBAM cost and compliance.
  3. Identify alternative sources available e.g. identical goods originating from the EU or other countries with nil/lower CBAM impact.

We have a number of experts available to help you with client discussions, from understanding policy, quantifying the impact through to incentives/funding, compliance and operational/strategic changes.