EU Carbon Border Adjustment Mechanism – What you need to know

The EU aims to achieve a 55% net reduction in greenhouse gas (GHG) emissions compared to 1990 levels by 2030 and become climate-neutral by 2050. But as the EU continues to implement measures to reach these goals, many non-EU countries have less onerous environmental policies in place. This puts the EU and its industries at risk of so-called carbon leakage, where high-carbon production shifts to markets with laxer standards rather than cutting global emissions. Creating a level playing field should also in theory stop European firms being undercut by third-party rivals operating in low-regulation jurisdictions. To mitigate these risks, the EU has implemented a Carbon Border Adjustment Mechanism (CBAM) which aims to ensure that the carbon price of imports is equivalent to the carbon price of domestic production.

The phased implementation of the EU CBAM began when the transitional phase came into force on 1 October 2023. The implementation will have two key stages:

The European Commission has referred to the transitional period as a "learning phase" and has outlined its intention to review a number of aspects of the EU CBAM before the implementation of the definitive phase. It has confirmed that areas of review will include the scope of the EU CBAM (to see whether other goods should be included), as well as the development of rules and processes to consider the effective carbon price paid abroad.

The principles and mechanisms set out below therefore may be subject to further change following the transitional phase. For more details please see our other posts on the EU CBAM, such as the CBAM Omnibus proposal.

The scope

The EU CBAM applies to embedded emissions in certain imported goods and precursors, identified by CN codes in Annex I to Regulation (EU) 2023/956 (the CBAM Regulation), in the following sectors: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. These goods have been identified as those with carbon intensive production and which are at the most significant risk of carbon leakage.

Once fully phased in, the EU CBAM will capture more than 50% of the emissions from sectors within scope of the EU ETS.

The exemptions

There are a small number of exemptions to the EU CBAM, including:

• a threshold exemption: goods will be exempt if the value does not exceed €150 per consignment;
• countries which apply the EU ETS (Norway, Iceland, Lichtenstein) or which have an ETS fully linked to the EU ETS (Switzerland), are exempted;
• goods for military use; and
• certain electricity imports.

The mechanism

The EU CBAM, in its definitive phase, will operate through a system of certificates. Each year, EU importers will declare the emissions embedded in their imports and surrender the corresponding number of CBAM certificates. The price of such certificates will correspond to the carbon price that would have been paid had the goods been produced in the EU (and therefore subject to the applicable carbon price in the EU). Specifically, the price of CBAM certificates will be based on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted, to align the carbon price paid via the CBAM as compared to the price paid by producers in the EU.

The CBAM will apply to EU authorised declarants, which would include EU importers and indirect customs representatives.

CBAM reporting

In the transitional phase, importers are required to report the following information quarterly: