With the transitional phase of the Carbon Border Adjustment Mechanism (CBAM) well under way, companies need to understand and prepare for CBAM to minimize the financial impact on their business and supply chain.
WHAT YOU NEED TO KNOW
What is CBAM?
The EU’s Carbon Border Adjustment Mechanism (CBAM) puts a price tag on the carbon emissions embodied in certain imported goods to equalize carbon pricing on domestic and imported goods.
CBAM essentially discourages European companies that import certain goods and materials into the EU from moving production to countries with lax environmental standards — known as carbon leakage — and incentivizes them to invest in cleaner technologies and processes.
The mechanism complements and reinforces the EU’s Emissions Trading System (ETS), a “cap-and-trade” system that covers emissions from roughly 10,000 energy sector installations, certain aircraft operators and, as of this year, maritime transport.
WHO THIS AFFECTS
Exporters and importers of emissions-intensive products
EU importers and non-EU and U.K. exporters of certain commodities are affected by CBAM.
The EU companies that import high-carbon-intensity products need to disclose the products’ embedded emissions, and from 2026 onward, they will need to pay a tax based on those emissions.
Non-EU and U.K. manufacturers who produce and export these goods — or sell to traders who export them to the EU — will need to provide data to their customers.
WHAT YOU NEED TO DO
A two-year transitional phase
CBAM is currently in its transitional phase, which runs through 2025. Its definitive regime begins in 2026. According to the EU Taxation and Customs Union, the “gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.”
During the transitional phase, CBAM applies to specific sectors with high carbon intensity and the potential for carbon leakage. These sectors include:
- Cement
- Iron and steel
- Aluminum
- Fertilizers
- Electricity
- Hydrogen
After the transitional phase: The CBAM definitive regime
Once CBAM has entered its definitive regime, EU importers of goods that are covered by the mechanism must register with national authorities, which also make CBAM certificates available for purchase. The price of these certificates will be based on “the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted.”
Each year, EU importers must declare the emissions embedded in their imports and submit the corresponding number of certificates.
Importers who can prove that a carbon price has already been paid during production of the imported goods can deduct the corresponding amount.
Note that during the transitional phase, companies that import the goods identified above are only required to report the direct and indirect GHG emissions embedded in their imports. They do not need to buy and surrender certificates.
As with all regulations, there is much to understand and prepare for. For more information about CBAM, visit our detailed blog on the regulation.
HOW SPHERA CAN HELP
Addressing the supply chain component
Given the sectors in focus, CBAM has significant implications for supply chains. Regulations such as the Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive have put supply chains in the spotlight, and CBAM will have the same effect.
Companies that must comply with CBAM will gain transparency in their supply chain and, eventually, a reduced carbon footprint. But their first order of business is preparation. Sphera can help.
Our Supply Chain Sustainability Solution helps businesses identify and mitigate ESG risks in their supply chain, design action plans and collect data for reporting.
With Sphera’s solution and support, companies can conduct the activities that are critical for their compliance effort with CBAM.
- Define system boundaries and required calculations: Expert consultants help companies identify and configure an optimal supplier calculator.
- Gather supply chain data: Assessments are used to collect data and calculate results for CBAM.
- Analyze results for reporting: Automated dashboards generate data for export or to be analyzed in-platform.
- Report: Importers submit results to regulatory bodies, and exporters are enabled to respond to customer requests.
- Strategize and optimize compliance: Businesses can use results to find ways to minimize future compliance costs and / or meet customer expectations.
Reduce your compliance challenges
The environmental benefits of CBAM are promising. By creating a disincentive for carbon-intensive production and an incentive for innovation, CBAM has the potential to be a powerful tool in the fight against climate change. But it creates more compliance challenges for businesses, both within and outside the EU.
Sphera’s Supply Chain Due Diligence Solution helps organizations collect the data they need for reporting, develop compliance-related action plans and identify and mitigate risks in their supply chains. Given the growing regulatory focus on supply chains, the solution offers a highly effective way to streamline compliance-related activities and minimize the risk of noncompliance.
The information provided in this blog is for general information purposes only, may not be updated in real time and does not constitute legal advice. Please consult with your legal and other advisors to discuss your particular needs and circumstances.
