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Carbon Border Adjustment Mechanism: The Timeline and Process of Declaring Carbon Leakage in Production

General Overview

The Carbon Border Adjustment Mechanism (CBAM), a carbon tax mechanism introduced by the EU, targets specific carbon-intensive goods entering the EU to combat carbon leakage. A transition period will continue until the policy comes into effect in 2026. CBAM replaces existing mechanisms, which allow companies to move production to regions with looser climate policies. The CBAM aims to equalize carbon prices between imports and domestic products under the ETS mechanism.

Goods covered by the CBAM

Covering goods like cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen, the CBAM will be expanded to include more categories in the future. Companies can import only if they’re authorized CBAM declarants. They buy CBAM certificates, with pricing based on weekly ETS allowances, deducting already-paid carbon prices. Annually, they declare imported goods’ emissions and submit corresponding CBAM certificates, selling surplus ones to other member states.

Responsibility for obtaining CBAM Certificates

CBAM directly impacts all individuals or entities importing goods into the EU (importers). Importers are tasked with obtaining pertinent information from manufacturers of CBAM goods imported into the EU, referred to as operators. Although operators don’t have direct obligations to the CBAM, they will experience indirect effects.

Timeline for CBAM obligations

A transitional period: October 1, 2023 to December 31, 2025

The transitional period eases companies into CBAM obligations, requiring quarterly reporting of emissions. The initial reporting deadline for the CBAM is set for January 31, 2024, with an additional 30-day allowance due to technical issues in the registry. Initially, during the transitional period, importers must provide quarterly reporting on direct and indirect greenhouse gas emissions (GHS) embedded in their imports. Methods used for this reporting include following the indications in the regulation (EU method) or, until July 2024, using default reference values; however, from January 1, 2025, only the EU method will be accepted. Accessing the CBAM transitional registry through national authorities is mandatory for reporting. Therefore, CBAM declarants must declare their carbon emissions and submit their reports using the dedicated EU portal.

Penalties for non-compliance

Non-compliance with CBAM reporting obligations or inaccuracies in CBAM reports can lead to penalties imposed by individual EU states, ranging from €10 to €50 per ton of unreported or inaccurately reported embedded emissions.

Authorized CBAM declarants who fail to submit the required number of CBAM certificates by May 31 of each year (starting in 2027) will face fines equivalent to those stipulated under the EU ETS, amounting to €100 for each ton of CO2.

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