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Background
As part of the EU Green Deal and the suite of legislation referred to as the ‘Fit for 55’ legislative package, the EU has introduced a number of policy measures. These serve to complement the EU’s union-wide goal of achieving climate neutrality by 2050 and reducing greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels. The increased focus by the EU on its decarbonisation efforts raised concerns that such efforts could be undermined by carbon leakage. Such leakage could result from:
This concern has resulted in a number of significant changes being made to the EU’s Emissions Trading System (EU ETS) as well as the introduction of the Carbon Border Adjustment Mechanism (CBAM) in an effort to safeguard against carbon leakage and incentivise emissions reductions.
In this article, we provide a brief overview of CBAM focusing on its key features and some practical considerations for businesses going forward.
Key features
There are two key objectives of CBAM. Firstly, it aims to put a fair price on the carbon emitted during the production of carbon intensive goods that are made outside of the EU when such products enter the EU. Secondly, it is designed to mitigate the risk of carbon leakage by aligning the price of certain goods imported into the EU with their actual carbon content. Overall, CBAM is intended to:
CBAM does not target countries, rather it focuses on the carbon content of goods imported into the EU for specific carbon intensive sectors. These are the sectors within the scope of the EU ETS that are most susceptible to carbon leakage. It also covers some indirect emissions under certain conditions. These carbon intensive sectors are cement, iron and steel, aluminium, fertilisers, hydrogen and electricity.
CBAM is being introduced in two phases:
Transitional period
Since 31 January 2024 (the end of the first reporting period for importers under CBAM), importers of in scope products have been required to submit detailed quarterly reports to the European Commission outlining:
During this phase, companies are not subject to financial obligations nor is their emissions data subject to verification by an EU accredited verifier. In scope companies can, therefore, use this opportunity to adjust their operations to comply with the incoming requirements. The information gathered during this period is also intended to facilitate the EU’s assessment of the extent to which these sectoral emissions correspond with its own carbon pricing schemes. Overall, the transitional period is intended to act as a pilot and learning period, designed to provide EU and non-EU businesses with a careful, predictable and proportionate transition while seeking to minimise disruption.
When fully implemented, the CBAM will effectively operate as a tax levied on certain carbon intensive products. However, during this transitional period, the obligation on in scope companies is simply to report on the level of carbon emissions embedded in their imports. Currently, there are several prescribed monitoring and reporting methods that are accepted. However, as of 1 January 2025, only the EU methodology for emissions calculations will be acceptable for reporting purposes. Details of this methodology are set out in an associated implementing regulation.
The European Commission is expected to conclude a review of CBAM’s functioning during the transitional period prior to the implementation of the definitive regime on 1 January 2026.
Definitive regime
The CBAM definitive regime will apply from 1 January 2026. This will result in a permanent system being implemented whereby importers will be required to pay a carbon price for importing CBAM goods. From this date, only importers that obtain authorisation as “authorised declarants” will be able to import CBAM goods into the EU. Importers subject to this requirement will be able to apply for this status via the CBAM registry from 1 January 2025, prior to it becoming mandatory on 1 January 2026. In Ireland, the national competent authority responsible for processing such applications is the Environmental Protection Agency.
The permanent system will see the introduction of a surrender and purchase scheme. Authorised declarants will be required to purchase CBAM certificates for the carbon emissions associated with the production of their imported goods, priced at the weekly average auction price of the EU ETS allowances. Reporting requirements will be reduced from quarterly to annual reports, with the first report due on 31 May 2027 for the preceding year. As such, they will be making annual declarations in respect of the carbon emissions embedded in their products and surrendering the corresponding number of certificates.
CBAM’s implementation will initially apply to those goods highlighted above. However, the European Commission has indicated that it will review the product scope under CBAM. This review will assess the feasibility of extending the scope of CBAM over time to include other goods subject to the EU ETS, thereby increasing the number of goods under the remit of CBAM. Businesses will therefore need to mindful of any updates in this regard, especially where their products do not currently fall within scope of CBAM.
Practical considerations
From a practical perspective, the first step for in scope companies is to understand the timelines that apply in respect of the various obligations being introduced. While in scope companies should already be reporting in line with the provisions applying during the transitional period, the ability to choose which reporting method to use ceases at the end of 2024. From 1 January 2025, in scope companies will be required to adhere to the EU method of reporting in respect of embedded emissions (as referred to earlier in this article). This method allows for either a calculation based approach (where emissions from source streams are determined on the basis of activity data) or a measurement based approach (where emissions from source streams are determined by continuous measurement of the concentration of the relevant greenhouse gases).
In scope companies will also be able to apply to their respective national competent authorities for “authorised declarant” status, which will become mandatory as of 1 January 2026. While the Revenue Commissioners are the customs authority for the purposes of the regulation introducing CBAM, it is the Environmental Protection Agency that has been designated as the national competent authority for the purposes of this legislation. Specific Irish legislation, the European Communities (Carbon Border Adjustment Mechanism) Regulations 2024, as amended, was recently introduced which sets out the details necessary for the implementation of the CBAM regulation in Ireland.
The European Commission has developed a self assessment tool to assist with determining which goods are subject to CBAM. This tool also provides details of the CBAM reporting requirements for particular types of goods during the transitional period.
Companies should not only evaluate their own strategies for reducing carbon emissions but also monitor the impact of their own supply chains for reporting purposes. Companies should also consider how existing data can be leveraged and adapted for CBAM compliance purposes.
With thanks to Coilin Flynn for his assistance in the preparation of this article.
For further information in relation to this topic, please contact Jill Shaw, ESG & Sustainability Lead or any other member of the ALG ESG & Sustainability team.
