On 1 October 2023, the Carbon Border Adjustment Mechanism ("CBAM") entered its transitional period. In December 2023, the European Commission published information clarifying the scope of the reporting obligations during the transitional period and the default values that can be used to determine the embedded emissions of imported products covered by CBAM. In this update, we will briefly discuss the key takeaways and what your business needs to consider during the start of the transitional period. We will go into the reporting requirements, including the use of default values, in the last paragraphs.

In the 'fit for 55'-package published on 14 July 2021, the European Commission announced the introduction of a Carbon Border Adjustment Mechanism to mitigate the risk of carbon leakage, i.e. companies moving their production processes or investments to third countries with less stringent climate policies. The risk of carbon leakage is currently addressed with the allocation of free emission allowances for certain industrial sectors in Europe. However, as the amount of available emission allowances is reduced on an annual basis and the allocation of free emission allowances is gradually phased out until 2034, the European Commission expects that the risk of carbon leakage may increase for products with an already high risk of carbon leakage and for products produced in energy-intensive sectors.

The definitive text of the CBAM Regulation was published in the Official Journal of the EU on 16 May 2023. CBAM effectively addresses the risks of carbon leakage by requiring certificates at a cost to be surrendered based on the embedded emissions of imported products within the scope of the CBAM Regulation. The number of certificates to be surrendered depends on the amount of specific embedded emissions of the imported products. Importers are therefore required to monitor and report the CO2-eq emissions released during the production of products imported into the EU. The data must be verified by an independent third-party verifier. As a result of the CBAM, the risks of carbon leakage can be mitigated while at the same time encouraging producers in third countries to decarbonise their production processes and encouraging third countries to adopt a carbon tax or cap-and-trade system.

The CBAM Regulation covers basic materials, semi-finished products and a limited number of finished products. These are categorised under iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen. The European Commission has announced that the scope of CBAM will be gradually extended to all sectors covered by the EU ETS by 2030 and in the near future, the scope of CBAM is expected to be further extended to include organic polymers and plastics. As only certain products are covered by CBAM, it is becoming increasingly important for declarants to correctly determine the tariff classification ("CN code") of products imported into the EU.

The CBAM Regulation applies when products are released for free circulation ("imported") into an EU Member State. An exception applies for products originating in certain countries and territories, such as EFTA countries, where the production is covered by the EU ETS or an equivalent cap-and-trade system. Consequently, it is becoming increasingly important to correctly determine the country of origin of products covered by CBAM, also in cases where no customs duties apply.

As the concept of importation into the EU is aligned with the customs procedure "release for free circulation" of the Union Customs Code ("UCC"), placing products under a customs suspension procedure (e.g. the inward processing procedure) does not result in an obligation to surrender certificates, thus protecting industrial activity in the EU and limiting the impact on global trade for products that do not enter the EU economic network.

In order to import products covered by the CBAM Regulation, importers must qualify as an authorised CBAM declarant. However, importers may instead delegate the obligation to apply for authorisation to an indirect customs representative. If the importer is not established in the customs territory of the EU, the indirect customs representative must apply for the status of authorised CBAM declarant.

After 1 January 2026, an annual CBAM declaration must be submitted containing the following information:

  • The total quantity of each type of product covered by CBAM imported in the previous calendar year
  • The total embedded emissions of these products
  • The total number of CBAM certificates to be surrendered, corresponding to the total embedded emissions
  • Copies of verification reports issued by accredited verifiers

The CBAM declaration must be submitted by 31 May of the following year. The first CBAM declaration should therefore be submitted by 31 May 2027 for products imported in 2026.

In the meantime however, the transitional period applies.

Transitional period of CBAM

During the transitional period of CBAM, the European Commission aims to ensure a smooth introduction of the reporting obligations to reduce the risk of disruptive impacts on trade, while collecting the necessary information to further specify the definitive methodology for the rules on the calculation of the actual embedded emissions. During this period, CBAM is not in full force and obligations may differ slightly from those outlined above. The key aspects of the transitional period are as follows:

  • Until the end of the transitional phase (31 December 2025) importers or indirect customs representatives are required to submit a CBAM report for each reporting quarter. The first CBAM report for the reporting period between 1 October 2023 and 31 December 2023 should be submitted by 31 January 2024.
  • The person responsible for submitting CBAM reports during the transitional period is defined as the reporting declarant. As for the authorised CBAM declarant, in general, the importer established in the EU customs territory is responsible for submitting the CBAM reports, except in the following cases:

    1. If the importer established in the EU customs territory has appointed an indirect customs representative and he so agrees; then the reporting obligations may be delegated to the indirect customs representative.
    2. If the importer is established outside the EU customs territory and he has appointed an indirect customs representative; then the indirect customs representative is by default responsible for complying with the reporting obligations.

The reporting declarant does not need to apply for authorisation to submit CBAM reports.

  • The CBAM report should contain the following information:

    1. The total quantity of products in scope of CBAM imported during the period
    2. Information on embedded direct and indirect emissions of these products
    3. Where applicable, the carbon price due in the country of origin
  • If the CBAM report is not submitted, is submitted incorrectly or incompletely, and the reporting declarant hasn't taken the necessary steps to correct or comply with the reporting obligation, EU Member States may impose a penalty on the reporting declarant. The amount of the penalty may range from EUR 10 to EUR 50 per tonne of unreported emissions, depending on relevant factors such as the extent of the unreported information and the degree of negligence of the reporting declarant.

Reporting requirements during the start of the transitional period

Due to the limited time available to ensure compliance and implement the reporting requirements, the European Commission is allowing the use of alternative methods to monitor and report embedded emissions for a limited period of time.

  • For goods other than electricity up to and including the third reporting period (30 June 2024), embedded emissions can be reported using the default values published by the European Commission without quantitative limits, thus ensuring that reporting declarants can submit CBAM reports if they do not yet have all information necessary. On 22 December 2023, the European Commission published these default values which can be found here.
  • Until the fifth reporting period (31 December 2024), alternative methods may be used to report embedded emissions, such as an emissions monitoring scheme or a carbon pricing scheme where the installation is located.
  • From the sixth reporting period (1 January 2025) onwards, embedded emissions should be reported using the full reporting methodology published by the European Commission (EU Method).

The first two CBAM reports, encompassing the reporting periods from 1 October 2023 to 31 March 2024, can be amended until 31 July 2024, thus allowing for some extra flexibility in amending the first two CBAM reports until the third CBAM report is due.

In January this year, the CBAM Trader Portal has been made fully operational in order for reporting declarants to submit the first CBAM report. Reporting declarants can now access the CBAM Trader Portal and get ready to prepare, edit and submit their first CBAM report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.