This is an update of our previous blog post “The EU – CBAM Carbon Border Adjustment Mechanism“. The official draft of the EU – CBAM regulation released on 14th July 2021 confirms the potential impact on the European operating model and supply chain for a wide range of industries.
On 14th July 2021, the European Commission adopted a package of proposals referred as “Fit for 55” package. This package aims to align the EU’s climate, energy, land use, transport and taxation policies for reducing net greenhouse gas emissions by at least 55% by 2030. Key highlights of the package for the business:
- Phase out free emission allowances for aviation and include shipping emissions in the EU ETS (Emission Trading System).
- Alternative Fuels Infrastructure Regulation requires that aircraft and ships have access to clean electricity supply in major ports and airports
- Maximum limit on the greenhouse gas content of energy used by ships calling at the EU ports
- A revision of the Energy Taxation Directive proposes to align the taxation of energy products with EU energy and climate policies
- A new Carbon Border Adjustment Mechanism (CBAM) will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage’.
All these measures will lead of additional costs and compliances for a wide range of business and industries. It is also seen as one of the tangible and clear measures for business to follow in order to meet its Environmental, social, and governance (ESG) criteria. Out of these, CBAM will have a direct impact on the companies importing the impacted goods into the EU.
The official draft confirms the proposal to impose a cost on certain carbon intensive goods entering the EU. The draft proposal provides insight on the potential impact as illustrated*:
Key features based on draft CBAM regulation:
- Scope of imported goods: Aluminium, Cement, Electricity, Fertilizers, Iron and Steel. The coverage of CBMA expected to expand to other product with carbon emission footprint.
- Geographical scope: imports into the EU from rest of the world (excluding good originating from Iceland, Liechtenstein, Norway and Switzerland)
- Import of covered goods shall not be allowed unless the declarant or importer is authorized by the competent authority (i.e. ‘authorized declarant’)
- The authorized declarant must be ‘established’ in the EU
- The authorized declarant must purchase CBAM certificates corresponding to value of the goods to be imported and must make quarterly / annual declaration to the competent authority
- Registration of operators and installations in third countries
- Non-compliance can lead to stoppage of goods at the border, penalty and possible administrative or criminal sanctions
- Bank guarantee required for new legal entities
- Anti-circumvention provisions
- Date of application: 1 January 2023 for registration and reporting. Other operative provisions will apply from 2026.
Relevance for EU operating models
- Additional cost and compliance: CBAM expose companies importing specified goods into the EU to additional cost and compliances. The cost and compliance will impact the ultimate landed cost of such goods, new kind of expertise or service providers required for compliance.
- Restriction for non-EU companies: As the non-EU established companies cannot be authorized, operating models with non-EU principals need to align with locally established entities/ service providers to undertake CBAM compliance.
- Procurement impact: CBAM incentivizes procurement or manufacturing of specified goods originating in the EU or from countries where carbon emission regulations are already in place. Likewise, CBAM makes it less economical to source specified goods from less sustainability-ambitious nations.
- Impact on wide range of industries: e.g. consumer product and pharm using aluminum packaging, automotive and industrial goods manufacturers using non-EU iron & steel and aluminum.
Some short and mid-term considerations for companies
Given this incumbent cost and compliance, we suggest some proactive steps:
- Evaluate whether CBAM impact on operations i.e. examine the purchase data, bill of material, transactional model to ascertain the applicability of CBAM. Please note that even if a company is not directly importing the specified products still the price from its EU suppliers which import such goods could increase.
- 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.
- Identify alternative sources available e.g. identical goods originating from the EU or other countries with nil/lower CBAM impact or alternatively accept the cost impact of sourcing from countries subject to CBAM charges.
- Review global value chain and footprint as they relate to EU region and CBAM implications. For example, serve the EU market from a location within the EU, local for local production and consumption.
In our experience, a focused data analytics exercise goes a long way to identify the potential impact or lack of it and help in preparing a targeted strategy. We have several experts available to help you with client discussions, from understanding policy, quantifying the impact through to incentives/funding, compliance and operational/strategic changes.