What is CBAM?

In a bid to accelerate the EU’s green transition, the EU introduced the Carbon Border Adjustment Mechanism. It targets carbon-intensive goods imported into EU territory. CBAM puts a duty on imported products and taxes importers, accordingly, assessing how much carbon was emitted during the production of an imported product. As a result, EU businesses need to account for emissions, whether they have been produced in the EU, or imported. 

Businesses importing goods into the EU from non-EU suppliers will now face a similar carbon cost to those sourcing from EU suppliers and already paying under the EU Emissions Trading System (ETS). The EU ETS already covers around 45% of the EU's greenhouse gas emissions, but through CBAM the EU can tackle ‘carbon leakage’, which occurs when companies move the production of goods to countries outside the EU and subsequently import carbon-intensive products back into the EU. 

Under CBAM, EU businesses will need to understand and declare the carbon impact of the goods they import. It expands carbon pricing beyond the EU Emissions Trading System (ETS), creating a level playing field between suppliers inside and outside the EU.
 

Who will be impacted?

As it stands, CBAM focuses on high-emitting commodities, so any business that imports or exports these goods into the EU will be affected. Any business that imports these goods into the EU will need to declare under CBAM and eventually pay for carbon certificates. Failure to do so could come at a financial cost.

Currently, CBAM applies to goods, including aluminium, cement, electricity, fertiliser, hydrogen, iron and steel. Its coverage, however, may expand over time.

Exporters that sell to EU businesses will have to provide more carbon data to their customers and could face indirect manufacturing costs as a result. CBAM therefore casts a wide net:

1. A car manufacturer in Germany that imports aluminium from China for its car production.
2. A company based in Turkey that supplies fertiliser to Romania.
3. A company in Italy that imports hydrogen as a substitute for natural gas in heating and electricity generation. 
4. A Danish offshore wind developer that predominantly uses imported iron and steel in the production of wind turbines and their bases. 
5. An Algerian cement producer exporting cement to French construction companies.
6. A French chemical production company importing electricity from the UK.
    

What does this mean for EU importers?

CBAM is mandatory for all EU businesses. Now in its transition phase, CBAM requires any business importing goods into the EU to understand the embedded emissions associated with each imported product and declare these in quarterly reports. Failure to report will lead to financial penalties of up to 50€ per tonne of CO₂e that is unaccounted for. No carbon levy is paid on imports from outside the EU until 1 January 2026 and fines for excess emissions alongside other penalties will come into force.

A reporting timeline.

From 1 January 2026, importers will declare the embedded emissions of their imports and surrender CBAM certificates as an allowance in response. CBAM certificates will mimic ETS certificates' weekly average auction price, creating a level playing field between suppliers inside and outside of the EU.

To ensure emissions are not double charged, CBAM includes provisions for carbon taxes and emissions trading systems outside of the EU. For example, if importers can prove a carbon price has already been paid during production, the corresponding amount will be deducted. In summary, EU importers will have to:

1. Identify the imported goods that fall under CBAM.
2. Select the calculation methodology and emissions factors to calculate the emissions.
3. Declare the quantity of material.
4. Declare the direct and indirect emissions embedded in imports.
5. Assess if goods are already carbon priced in the country of production or purchase. If so, report the carbon price that is due or has been paid for the embedded emissions in the country of origin
6. Purchase the corresponding number of certificates.

Importers will need to work closely with their suppliers outside of the EU and ask for the upstream emissions or the carbon footprints of each product they purchase in order to pay the correct carbon price.
 

Reporting requirements

From 1 January 2025, the methods to calculate imported emissions become more stringent. Importers must follow the ‘EU method’, reporting on the direct and indirect emissions from imported goods and attributing emissions to the individual supplier, the goods, and the quantity of material imported.

The EU method allows two different reporting methodologies: the calculations-based approach and the measurement-based approach. 

• The calculations-based approach determines emissions from source streams using either:
  • activity data and relevant emission factors, or
  • a mass-balance approach, estimating emissions from production by comparing the carbon content of all the inputs and outputs of the production process.
• The measurement-based approach measures greenhouse gas concentrations and flow of flue gases directly at the manufacturing plant, to determine emissions from the production of a good. 

If EU companies do not receive supplier-specific data, they can use default values to estimate their emissions. Default values represent the average emissions for producing a tonne of a given product in the country of origin and can be used for materials responsible for less than 20% of the total emissions of complex goods. Such emission factors are inherently conservative and will report higher emissions in the products than primary supplier data, which offers a more precise picture. Gathering actual data on imports from suppliers therefore will not only lead to more comprehensive insights into the supply chain but will also likely save costs once CBAM certificates come into play.
 

What does this mean for European businesses that export into the EU?

CBAM calls for businesses within the EU to invest in the decarbonisation of their supply chains. It will prompt EU businesses to evaluate the potential benefits and drawbacks of selecting suppliers outside of the EU on a long-term basis. To remain competitive, businesses across countries like Turkey, Albania, Serbia, Ukraine and other non-EU member states, have an opportunity to innovate and offer more low carbon, energy-efficient products that are more attractive under CBAM rules.

However, CBAM will also have immediate consequences. Businesses that currently don’t fall under the EU ETS will see an increase in calls for carbon transparency from their EU customers, as they seek to understand the embedded emissions profile of the goods they purchase. To remain competitive and meet customer demand, suppliers will need to provide verified carbon footprints of their products to EU customers.
 

How the Carbon Trust can help

With over 20 years of carbon expertise, we help businesses calculate their product carbon footprints, assess their climate risks and report their emissions. As CBAM focuses on carbon emissions embedded in products, our product carbon footprinting services cover CBAM requirements. More so, they give you further insights into the emissions of the products you export and their emission hotspots and reduction opportunities.  

Our Europe experts provide internal workshops for your team. From the business implications of CBAM to its technical and reporting requirements and the processes needed to fulfil your CBAM obligations from start to finish, we share advice on data gathering, emissions mapping, and key areas to focus on when collecting data from suppliers.