As a Chief Supply Chain Officer or Chief Procurement Officer, navigating the complexities of global supply chain regulations is part of your expertise. However, the convergence of multiple regulatory frameworks with overlapping and stringent deadlines has significantly heightened the complexity and urgency of achieving compliance.
As the EU’s Carbon Border Adjustment Mechanism (CBAM) demands a focused and strategic approach. CBAM is set to reshape international trade dynamics, requiring companies to integrate carbon accounting into their operations and supply chains.
This blog will serve as the starting point of a 12-month guide to understanding and preparing for CBAM compliance. By unpacking its scope and requirements, we aim to equip you with the knowledge needed to initiate your organization’s transition. This month focuses on providing a basic understanding of CBAM, and starting next month we provide guidance on how to build a strong CBAM compliance team.
What Is CBAM?
CBAM is a cornerstone policy of the EU’s Green Deal to encourage global greenhouse gas emission reductions. The mechanism imposes a carbon pricing framework on imports of certain goods into the EU to ensure that they align with the Union’s internal carbon pricing rules. The goal of the law is to reduce “carbon leakage” – where emissions in the EU decline only to see emissions in non-EU supplier countries rise.
Key aspects of CBAM include:
- Targeted Sectors: Initially covering imported cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity.
- Carbon Pricing: Importers must purchase CBAM certificates corresponding to the carbon emissions embedded in the goods they bring into the EU.
- Transitional Period: Beginning October 2023, a transitional phase mandates reporting without financial obligations, evolving into full implementation with carbon pricing by 2026.
- Reporting Obligations: Importers must report emissions data associated with their products, requiring detailed collaboration with upstream suppliers.
Why Is CBAM Significant for Supply Chains?
CBAM will directly impact the cost structure and operational strategies of companies importing into the EU. Key implications include:
- Cost Impact: The need to purchase CBAM certificates will increase the cost of carbon-intensive imports, incentivizing cleaner production methods. Shifting purchasing to low-carbon suppliers will reduce cost impacts. Supply Chain Transparency: Organizations must track and report emissions for each CBAM good, requiring robust data collection and verification systems.
- Competitive Dynamics: Smart compliance with CBAM can offer a competitive edge in markets prioritizing sustainability.
Immediate Steps to Take
Over the next month, focus on building a foundation for CBAM readiness by:
- Establish Internal Expertise: Create a task force to oversee CBAM compliance, integrating carbon accounting into procurement and operational strategies.
- Map Carbon Footprints: Identify products within your supply chain subject to CBAM and evaluate their carbon footprints.
- Engage Suppliers: Collaborate with suppliers to assess their emissions data collection capabilities and align on reporting requirements.
- Monitor Policy Updates: Stay informed about CBAM’s evolving implementation timeline and sectoral expansions.
How CBAM Fits into Your Strategic Goals
CBAM isn’t just a compliance challenge; it’s an opportunity to:
- Find new ways to cut cost in the supply chain
- Enhance your organization’s sustainability credentials.
- Build stronger, more transparent relationships with suppliers.
- Gain an early mover advantage by aligning with global trends toward decarbonization.
What’s Next?
The next blog in this series will provide detailed guidance on building a cross-functional internal CBAM project management team and how to best engage multiple-stakeholders to achieve CBAM compliance at the least cost.
Resources to Get Started
To help you dive deeper into CBAM’s requirements and implications, the following resources are invaluable:
- European Commission CBAM Overview
https://ec.europa.eu/clima/ - Carbon Boarder Adjustment Mechanism
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en - UNEP Carbon Emissions Reporting Guidance
https://www.unep.org/resources - Commission adopts detailed reporting rules for the Carbon Border Adjustment Mechanism’s transitional phase https://taxation-customs.ec.europa.eu/news/commission-adopts-detailed-reporting-rules-carbon-border-adjustment-mechanisms-transitional-phase-2023-08-17_en
CBAM represents a transformative moment for global supply chains, necessitating proactive planning and adaptation. By taking action now, you can turn compliance into a strategic advantage, aligning with sustainability goals while meeting regulatory demands.