Carbon Border Adjustment Mechanism

Introduction

Regulation (EU) 2023/956 establishes the Carbon Border Adjustment Mechanism (CBAM), a landmark environmental policy designed to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU. This mechanism ensures that the climate efforts of the EU are not undermined by production shifting to countries with less ambitious climate policies.

Evolution & Relations to Other Laws

CBAM closely complements the EU Emissions Trading System (EU ETS) established under Directive 2003/87/EC. It is designed to mirror the EU ETS by applying an equivalent carbon pricing system to imports, thereby replacing the existing mechanisms (like the free allocation of EU ETS allowances) that previously aimed to prevent the risk of carbon leakage. It also intersects heavily with the Union Customs Code (Regulation (EU) No 952/2013) for import surveillance and enforcement.

Main Goal

The primary objective of CBAM is to prevent "carbon leakage"—the risk that companies move their carbon-intensive production abroad to countries with weaker climate policies. By equalizing the price of carbon between domestic products and imports, it encourages global industrial decarbonization and supports the goals of the Paris Agreement.

Who It Applies To

The regulation applies to importers or their appointed indirect customs representatives who import covered carbon-intensive goods into the customs territory of the Union. In order to import these goods, such entities must apply for and obtain the status of an "authorised CBAM declarant."

Key Dates

• October 1, 2023: Application of the Transitional Period begins (only reporting obligations apply).
• December 31, 2024: Customs authorities and the CBAM registry implementation milestones.
• January 1, 2026: Start of the Definitive Period. Financial obligations (certificate surrender) and strict import restrictions to authorized declarants take effect.
• February 1, 2027: Common central platform for the sale of CBAM certificates becomes operational.
• September 30, 2027: First deadline for surrendering CBAM certificates corresponding to emissions embedded in goods imported in the year 2026.

Exemptions

• De minimis exemption: Importers are exempt if the total cumulative net mass of imported covered goods does not exceed 50 tonnes per calendar year (single mass-based threshold).
• Military use: Goods imported for military activities are exempt.
• Exempted Origins: Goods originating in countries or territories fully linked to the EU ETS (e.g., Iceland, Liechtenstein, Norway, Switzerland, Büsingen, Heligoland, Livigno, Ceuta, Melilla) are excluded from the scope.

Key Provisions

• CBAM Registry: The Commission establishes a central, standardized electronic registry of all authorized CBAM declarants and their certificate accounts.
• CBAM Certificates: Certificates representing one tonne of CO2e must be purchased at a price reflecting the weekly average auction price of EU ETS allowances.
• Calculation & Verification: Declarants must calculate direct (and for some products, indirect) embedded greenhouse gas emissions using strict EU methodologies. Actual emissions must be verified by an accredited third-party verifier.
• Carbon Price Deduction: Importers can claim a reduction in the number of CBAM certificates to be surrendered if a carbon price has already been effectively paid in the country of origin.

Obligations & Requirements

• Authorization: No covered goods may be imported without the status of an "authorised CBAM declarant."
• Reporting: During the transitional phase, quarterly CBAM reports are required. In the definitive phase, an annual CBAM declaration is due by September 30.
• Surrender of Certificates: Declarants must surrender an amount of CBAM certificates equivalent to the embedded emissions of their imports for the previous year.
• Quarterly Account Balances: From 2027 onward, declarants must ensure that at the end of each quarter, their CBAM account holds certificates corresponding to at least 50% of the embedded emissions of goods imported since the beginning of that calendar year.

Affected Products

The legislation specifically targets imports in highly carbon-intensive sectors listed in Annex I:

• Cement
• Electricity
• Fertilisers
• Iron and Steel
• Aluminium
• Chemicals (Hydrogen)

Penalties

• Failure to Surrender: Declarants failing to surrender sufficient CBAM certificates by the September 30 deadline face a penalty identical to the EU ETS excess emissions penalty (applied per missing certificate).
• Unauthorized Importation: Persons introducing covered goods without complying with the regulation (e.g., without authorization or bypassing the system) face a penalty of 3 to 5 times the standard penalty amount.
• Circumvention: Non-genuine arrangements designed to split shipments artificially to avoid the 50-tonne threshold are considered serious infringements subject to penalties and revocation of authorization.