The new CO2 border adjustment mechanism (Carbon Border Adjustment Mechanism - “CBAM”) - first statutory reporting obligations set for January 2024

The European Union Regulation (EU) 2023/956 of 10 May 2023 establishing a CO2 border adjustment mechanism (“CBAM Regulation”) has been applicable since 1 October 2023. The new CO2 Carbon Border Adjustment Mechanism (“CBAM”) establishes as from 1 October 2023 a large number of obligations for companies that import certain goods from third countries into the EU. In addition to comprehensive reporting obligations, CBAM introduces a new type of CO2 pricing for imports into the EU. Greenhouse gas emissions generated during the production of certain goods are to be offset by the mandatory purchase of CBAM certificates when these goods are imported into the EU. CBAM is closely linked to the European Emissions Trading System (“EU ETS”), which has been in place since 2005.

What is “CBAM”? Why is it being introduced? What is the link between CBAM and the EU ETS? Which goods are affected? And what challenges will importers and manufacturers of these goods face? We now deal with this and more in the following article.

What is CBAM?

CBAM is a climate policy measure as part of the European “Fit for 55” package of measures, which aims to achieve a 55% reduction in net greenhouse gas emissions by 2030 compared to 1990 levels. The package of measures serves to implement the EU’s “Green Deal”, which aims to make Europe climate-neutral by 2050.

The core content of CBAM is that importers of certain goods from third countries into the EU will in future be obliged to purchase CBAM certificates in order to offset the CO2 emissions emitted during the production of the goods. One CBAM certificate corresponds to one tonne of CO2 e (carbon dioxide equivalents) of “embedded emissions” associated with a product (Article 3 no. 24 CBAM Regulation). Embedded emissions are the direct emissions released during the production of goods and indirect emissions from the generation of electricity consumed during the production of goods (Article 3 no. 22 CBAM Regulation). In this context, importers must submit comprehensive annual reports on the embedded emissions associated with the goods. The first report is already due in January 2024.

What is the aim and background of CBAM?

The aim of the CBAM Regulation is to create a level playing field for goods produced within the EU and imported goods from third countries. In addition, incentives are to be created for third countries to adopt lower-emission processes.

The background to the introduction of CBAM is that the European Emissions Trading System (“EU ETS”) has been in place since 2005 for goods manufactured within the EU, according to which the production of these goods is priced using EU ETS certificates. However, due to the resulting increase in manufacturing costs, there is a risk that companies will relocate their CO2 emissions and ultimately their production, including the associated jobs, to third countries (“carbon leakage”). To prevent this relocation, EU ETS allowances have so far been allocated free of charge. However, this free allocation has in turn the effect of reducing incentives to invest in reducing emissions, which is why the free allocation of EU ETS allowances will be gradually reduced in future. The introduction of CBAM is now intended to prevent carbon leakage due to the reduction in free EU ETS allowances. At the same time as the gradual abolition of the allocation of free EU ETS allowances, CBAM will therefore gradually introduce the pricing of greenhouse gas emissions for the import of goods manufactured in third countries. The aim is to make it less attractive to relocate production abroad by pricing goods from third countries in line with the EU ETS.

Which goods fall within the scope of “CBAM”?

Goods within the meaning of Annex I of the CBAM Regulation “originating in a third country” are covered by the scope of the CBAM Regulation, where those goods, or processed products from those goods resulting from the inward processing procedure are imported into the customs territory of the Union (Article 2 paragraph 1 CBAM Regulation). The latter also applies if the processed products from the goods are not listed in Annex I of the CBAM Regulation.

Imported goods are deemed to originate from third countries if they are of “non-preferential origin” within the meaning of Article 59 of the Union Customs Code (“UCC”) (Regulation (EU) No. 952/2013). The classification of goods under the Combined Nomenclature codes (CN codes) listed in Annex I to the CBAM Regulation in accordance with Regulation (EEC) No 2658/87 is decisive for the question of whether goods are covered by CBAM.

The following product groups are currently covered in accordance with Annex I of the CBAM: 

• Cement, including cement clinker and alumina cement 
• Electricity 
• Fertilisers including primary products such as ammonia and potassium nitrate 
• Iron and steel including further processed products, e.g. pipes and containers 
• Aluminium including further processed products, e.g. pipes and containers 
• Chemicals (hydrogen)

These are goods whose production within the EU is subject to the EU ETS. It can be assumed that the catalogue of goods will be continuously expanded, in particular to include other goods that are already subject to the EU ETS but are not yet covered by CBAM.

From 1 January 2026, only importers registered and authorised (“CBAM declarants”) in the register provided for this purpose (“CBAM register”) will be authorised to import these goods into the customs territory of the Union (Article 4 CBAM Regulation). The customs authorities of the Member States are responsible for monitoring imports (Article 25 CBAM Regulation).

Goods originating in the countries and territories listed in Annex III to the CBAM Regulation are excluded from the scope of the CBAM Regulation in accordance with Article 2 paragraph 4 CBAM Regulation. At present, these are Iceland, Liechtenstein, Norway, Switzerland and the territories of Büsingen, Helgoland, Livigno, Ceuta and Melilla. These are third countries and territories that are already subject to the EU ETS or are covered by a CO2 pricing system linked to the EU ETS. The list can be amended and supplemented by the EU Commission. In addition, goods are also excluded from the scope of application if the individual value of the goods per consignment is less than €150, if goods are transported in the personal luggage of travellers and their value is less than €150 or if goods are transported or used in the context of military activities (Article 2 paragraph 3 CBAM Regulation). Special provisions apply to the import of processed products from the outward processing procedure and to the import of so-called returned goods. The latter, for example, are exempt from the reporting obligation during the transitional phase (Article 34 paragraph 2 (b) CBAM Regulation).

The CBAM Regulation will be introduced gradually in several phases. The transitional phase began on 1 October 2023. The Regulation will apply in full from 1 January 2026 (Article 36 CBAM Regulation).

What applies in the transitional phase from 1 October 2023?

During the transitional phase, importers of the aforementioned goods are obliged to submit a quarterly report with information on the goods imported in that quarter (“CBAM report”) (Article 35 CBAM Regulation). In particular, the report must contain information on the total quantity of goods imported in the quarter, the quantity of embedded emissions in tonnes of CO2 e emissions per MWh of electricity or per tonne of each type of goods, the quantity of indirect emissions and the CO2 price paid in the country of origin (Article 35 paragraph 2 CBAM Regulation). The determination of embedded emissions is likely to pose a particular challenge for “complex goods”, i.e. goods whose production requires input materials (precursors) and fuels, which in turn contain embedded emissions. Detailed requirements for the CBAM report are set out in the CBAM Implementing Regulation (Regulation (EU) 2023/1773 of 17 August 2023). The first CBAM report must be submitted by 31 January 2024. However, the first two reports can still be corrected up until 31 June 2024 (Article 9 paragraph 2 CBAM Implementing Regulation).

The report must be submitted via a “Transitional CBAM Registry” provided by the EU Commission. However, access to the register should be applied for via the competent national authority (“NCA”) of the Member State in which the importer is based. For Germany, this authority has not yet been determined at the time of publication of this article.

From 1 January 2025, importers can apply for authorisation as CBAM declarants (Article 5 CBAM Regulation). In this context, the Commission will set up a CBAM register of authorised CBAM declarants (Article 14 CBAM Regulation).

What applies from 1 January 2026?

The CBAM Regulation will apply in full from 1 January 2026. From this date, the goods concerned may only be imported by authorised CBAM declarants. CBAM declarants must determine the embedded emissions associated with the goods (Article 7 CBAM Regulation). This is likely to be a major challenge, particularly if input materials and fuels are used in the manufacture of the goods, which also contain embedded emissions.

Every year by 31 May, importers must submit a “CBAM declaration” for the previous year (Article 6 CBAM Regulation). The information required here roughly corresponds to the reporting obligations of the CBAM report from the transitional phase. The CBAM declaration is due for the first time on 31 May 2027 for the year 2026. The CBAM declarant must purchase a CBAM certificate for each tonne of CO2 e specified in the CBAM declaration from the respective Member State via a “common central platform” yet to be established (Article 20 CBAM Regulation) and submit it annually via the CBAM registry by 31 May - for the first time by 31 May 2027 for the year 2026. The price of the CBAM allowances is based on the average price of the closing prices of the EU ETS allowances in a calendar week (Article 21 paragraph 1 CBAM Regulation). The number of CBAM allowances to be surrendered can be reduced in accordance with Article 9 of the CBAM Regulation if the importer can prove that a CO2 price has already been paid in the country of origin. False or incorrect CBAM reports are subject to penalties of €10 to €50 per tonne of unreported emissions.

Outlook and conclusion

The new CO2 border adjustment mechanism will pose major challenges for importers of goods from third countries and plant operators in third countries due to its high level of complexity. In particular, the determination of embedded emissions in the manufacture of goods with a range of primary products is difficult in a globalised supply chain, as there are no uniform international standards for corresponding verification systems. Importers and plant operators must set up monitoring systems within a short period of time with regard to the reporting obligations already in force. The first report is already due on 31 January 2024. In addition, companies are exposed to legal uncertainties, as the catalogue of affected goods is expected to be expanded, which will make it necessary to monitor EU regulations accordingly.

It is essential for affected companies to deal with CBAM, and in particular the complex reporting obligations, at an early stage. In order to obtain the information required for the CBAM report, importers should also contact their suppliers and plant operators in third countries promptly.

We will be happy to support you with all challenges relating to CBAM. From reviewing and assessing potentially affected products, to advising on the preparation of the CBAM reports due in January and preparing for the full implementation of the CBAM Regulation from January 2026 - our team of experts in energy law and commercial and distribution law, led by our partners Dr Markus Böhme and Dr Martin Rothermel, will support you in getting to grips with this complex new set of regulations.