The new Carbon Border Adjustment Mechanism (CBAM)

On October 1, 2023, the transitional period of the Carbon Border Adjustment Mechanism (CBAM) began. The transitional period imposes reporting obligations until December 31, 2025, on imports of products subject to the mechanism (cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen). The Commission has published guidelines on the mechanism for importers and non-EU producers.

The CBAM has been designed with the aim of progressively replacing existing mechanisms to address the risk of "carbon leakage" or, in other words, to prevent companies from circumventing the costs associated with CO₂ emissions by moving production to territories with less burdensome rules than those applicable in the European Union and, in turn, to maintain the price signal that encourages investment in the reduction of greenhouse gases. In our last Post | The Carbon Border Adjustment Mechanism, focusing on the adoption of Regulation 2023/956, of May 10, 2023, establishing this adjustment mechanism, we discussed its main features, the date on which it comes into effect and the obligation for importers of goods falling within its scope to report greenhouse gas emissions caused directly or indirectly by their imports from October 1, 2023.

To regulate the requirements of this reporting obligation, Implementing Regulation 2023/1773 was adopted on August 17, 2023, laying down the rules for the implementation of Regulation 2023/956 during the transitional period. During this transitional phase, importers or indirect customs representatives (on behalf of the former) will be required to submit quarterly reports in respect of the imported goods initially subject to the mechanism. The first report must be submitted no later than January 31, 2024, and will include information on goods imported during the fourth quarter of 2023.

These reports must reflect:

• the quantity of imported goods, expressed in megawatt-hours for electricity and in metric tons for other goods;
• the type of goods identified by their eight-digit CN code;
• the direct and indirect emissions implicit in them; and
• information on the carbon price payable in the country of origin.

More specifically, regarding the direct emissions of these goods, the following must be indicated: (i) their country of origin; (ii) the facility where they were produced; (iii) the production routes used; (iv) the specific implied direct emissions of the goods; (v) the reporting requirements that are affected by the implied emissions of certain goods; (vi) for electricity, the emission factor used and the data source or method used to determine this factor; and, (vii) for steel products, the identification number of the specific steel mill where a specific batch of raw materials is produced, if known.

For specific implied indirect emissions, the following should be reported: (i) the electricity consumed by the production process in megawatt-hours per metric ton of goods produced, (ii) confirmation of whether the declarant is reporting actual emissions or the default values published by the Commission, (iii) the emissions factor of the electricity consumed, and (iv) the amount of specific implied indirect emissions.

Given the difficulties that may arise in the methods for calculating the above figures, which are detailed in the Implementing Regulation, the regulations also include simpler alternative methods until December 31, 2024, as well as the possibility of using estimates for complex goods, subject to certain quantitative limits. The default values provided and published by the Commission may also be used until July 31, 2024.

The reports must be submitted to the electronic database of the CBAM Transitional Registry. The purpose of this database is to allow the communication, control and exchange of information between the Commission, the Member States, the customs authorities and the declarants. The Commission will check these reports and, if it considers them to be incorrect or incomplete, it will forward them to the competent authority of the Member State to initiate a review of the declared data and implement a correction procedure.

With regard to the penalty system, penalties will be applied for failure to submit reports or because their content is incorrect or incomplete, and where the necessary measures have not been taken to correct them once the correction procedure has commenced. The amount of the penalty will be between 10 and 50 euros per metric ton of emissions not reported, which will increase in line with the European CPI.

The Commission has published several documents to assist declarants in complying with their obligations. In particular, guidance notes have been published on the application of the reporting requirements for both importers of goods into the EU and operators of facilities in third countries. A Q&A on the main aspects of the CBAM is also available.