In the 'fit for 55'-package published on 14 July 2021, the European Commission announced the introduction of a carbon border adjustment mechanism ("CBAM") 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 through the provision of free emission allowances for production plants in Europe. However, as the European Commission has proposed to increase the annual reduction of available emission allowances and the gradual phasing out of free emission allowances until 2034, the European Commission expects that the risk of carbon leakage may increase for goods with an already high risk of carbon leakage and goods produced in energy-intensive sectors.

On 16 May 2023, the final text of the regulation for the carbon border adjustment mechanism has been published in the Official Journal of the EU. The CBAM effectively addresses the risks of carbon leakage by requiring certificates to be surrendered based on the embedded emissions of imported goods within the scope of the CBAM regulation. The amount of certificates to be surrendered depends on the amount of specific embedded emissions of the imported goods. Importers are therefore required to monitor and report the CO2-eq emissions released during the production of goods imported into the EU. The data needs to be verified by an independent verifier. As a result of the CBAM, the risks of carbon leakage can be mitigated while simultaneously 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 products covered by the CBAM regulation include materials, semi-finished products and a limited number of finished products. These goods can be categorised under iron and steel, cement, fertiliser, aluminium, electricity and hydrogen. The European Commission has announced that the scope of CBAM will be gradually expanded to all sectors covered by the EU ETS by 2030. In the near future, it is expected that the scope of CBAM will be further expanded to include organic polymers and polymers. Because only particular products are in scope of CBAM, it will become more important for declarants to correctly determine the tariff classification ("CN code") of goods imported in the EU.

The CBAM regulation applies to goods covered under this regulation which are imported into an EU Member State. In the CBAM regulation, an exception is made for goods originating in certain countries and territories, such as EFTA countries, where the production of goods is currently covered by the EU ETS or an equivalent cap-and-trade system. As the (non-)preferential origin of goods is relevant for determining the applicability of the CBAM regulation, it may become more important to correctly determine the country of origin of goods covered by CBAM, even if these goods are not currently subject to customs duties.

Importers must qualify as an authorised CBAM declarant in order to import goods covered by the CBAM regulation. Importers may delegate the obligation to apply for authorisation to an indirect customs representative instead. If the importer is not established in the customs territory of the EU, the indirect customs representative must apply for the status of CBAM declarant by default.

An annual CBAM declaration must be submitted, containing the following information:

  • Total quantity of each type of goods
  • Total embedded emissions
  • Total number of 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 the 31st of May of the following year.

The concept of importation into the EU is aligned with the customs procedure "release for free circulation" of the EU Customs Code ("UCC"), meaning goods being placed under a customs suspension procedure (e.g. inward processing procedure) does not result in the obligation to surrender certificates. For goods released for free circulation that have previously been placed under the outward processing procedure or returned goods relief procedure, no certificates or fewer certificates need to be surrendered, thus protecting industrial activity in the EU and limiting the impact on global trade for goods that do not enter the economic network of the Union.

Transitional period  

On 17 August 2023, the European Commission has adopted the CBAM implementing regulation laying down the rules of application during the transitional period of CBAM. During the transitional period, the European Commission aims to ensure a smooth introduction of the reporting obligations to reduce the risk of disruptive impacts on trade, while also collecting the necessary information to further specify the definitive methodology for calculating of the embedded emissions. During the transitional period, CBAM is not yet in full force and obligations may slightly differ from the aforementioned.

  1. During the transitional period of CBAM, importers should submit a quarterly CBAM report no later than one month after the end of that quarter, containing information on the products imported during that quarter. The first report should be submitted by 31 January 2024 for goods imported in the fourth quarter of 2023.
  2. The person responsible for fulfilling the reporting obligations during the transitional period of CBAM is defined as the reporting declarant. In general, the importer established in the EU customs territory is responsible for complying with the reporting obligations, except in the following cases (as also mentioned above):
    1. If the importer established in the EU customs territory has appointed an indirect customs representative and he so agrees, the reporting obligations may be delegated to the indirect customs representative.
    2. If the importer is established outside the EU customs territory, the indirect customs representative is responsible for complying with the reporting obligations by default.
  3. The CBAM report should include information on the quantity and type of goods imported in the previous quarter, where only the goods in scope of the CBAM regulation need to be reported. In addition, reporting declarants need to report detailed information on the embedded emissions of the goods as well as data on the indirect emissions.
  4. If the CBAM report is not submitted, or 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.
  5. In general, reporting declarants are required to report the actual embedded emissions of imported products in the CBAM report based on the methods published by the European Commission. Until 31 December 2024, alternative methods may be used to determine the actual embedded emissions. By way of derogation, default reference values may be reported until 31 July 2024 if the reporting declarant does not have all the information necessary to report the actual embedded emissions.
  6. For complex goods, 20% of the total embedded emissions may be based on estimations, allowing for some flexibility.

How to start preparing for the reporting obligations during the transitional period of CBAM

During the transitional period of CBAM, importers will be subject to various reporting requirements. We understand that preparing for these reporting obligations can be difficult. For more information on how to prepare for the transitional period of CBAM and how Loyens & Loeff can help you prepare can be found here.

Further information

If you have any questions about the CBAM regulation and/or the responsibilities of declarants during the transitional period, please do not hesitate to contact us.