Insight Focus

• CBAM reporting will cover a transitional period from 2023 to 2025.
• “Embedded emissions” in shipments of imported materials will be monitored.
• Failure to comply will result in penalties of €10-€50 per tonne or higher.

Globally imported goods will be regulated more closely due to new rules from the European Union.

The EU has published its Carbon Border Adjustment Mechanism (CBAM) reporting regulations for 2023-2025. These regulations govern how companies should report emissions from imported materials in the transitional period of its Carbon Border Adjustment Mechanism (CBAM) from 1 October 2023 to the 31 December 2025.

The goods, covered by the EU CBAM, include cement, electricity, fertilizers, iron and steel, aluminium, and other chemicals. The CBAM will set an equivalent cost of emissions on the carbon content of selected materials imported from countries where no carbon price is imposed on producers.

From October, importers in Europe will be required to report key details every quarter: including all “embedded emissions” in shipments of iron and steel, cement, aluminium, fertilisers, electricity, and hydrogen.

Details will include the quantity of goods imported, their geographical source – including the installation at which they were produced – the method of production, and their specific embedded emissions.

The transitional period of CBAM covers the period of time between 1 October 2023 start of reporting and the full implementation of CBAM, which is scheduled to begin on 1 January 2026. Until the full implementation starts, there will be no cost of compliance.

The Implementing Regulation sets out the reporting requirements in detail, including guidance on how to calculate embedded emissions, as well as on how to submit reports to the European Commission.

The implementing regulation complements the original CBAM legislation which was passed in May.

Failure to fully report embedded emissions will be subject to penalties ranging from €10-€50 per tonne of unreported emissions in the first instance, and higher for a subsequent failure or a failure to report for more than six months.

Under the full CBAM implementation rules, importers will need to purchase CBAM certificates directly from member states and surrender them each year to the European Commission.

While the reporting of embedded emissions must be done on a quarterly basis, the surrender of CBAM certificates will be done on an annual basis, with a deadline for surrender no later than 31 May of the following year.

This offers companies some flexibility in deciding when to buy their certificates but does not alter their annual compliance obligation.

If any company purchases more CBAM certificates than it requires for compliance, it may ask the Commission to repurchase any unused certificates no later than the end of the following June. Repurchase will be limited to 33% of the total purchased by the company in the previous year. The price paid will be the original price of purchase for each certificate.

Again, this will allow companies the flexibility to monitor their financial exposure and surrender the lowest-priced certificates first.

Any certificates that have not been surrendered or repurchased by the Commission will be automatically cancelled by each the 1 July.

CBAM certificates will be priced dynamically. Each week, the European Commission will publish the sales price, which will be equivalent to the previous week’s average daily auction price for EU emission Allowances in the EU ETS. Europe’s carbon price is currently around €85/tonne.

CBAM certificates will not be fungible with EU Allowances, and EUAs will not be eligible for CBAM compliance. However, it’s thought likely that larger importers may hedge their CBAM exposure by taking positions in the secondary EUA futures market.