Engage suppliers or pay the price: Importers must act now to avoid CBAM fines

If carbon-intensive producers in the highest emitting sectors don’t report their emissions, who should be penalized? 

Under the EU’s CBAM, it’s their customers who will pay: the commodities traders, the finished-goods manufacturers and all other companies who import products covered by the regulation into the EU. 

For these businesses, it’s not the 2026 CBAM carbon price that’s top of mind right now. Instead, they’re concerned about the fines that are just around the corner in 2024, for failure to report imported emissions. 

CBAM reporting will get harder, with fines from the outset

From their very first submission in January 2024, importers (registered as authorized CBAM declarants) will open themselves up to fines if they don’t follow the CBAM reporting requirements. 

For the first three reporting quarters of the CBAM transitional period (January, April and July 2024), that means failing to complete a report or submitting wrongful information (and not correcting it after being requested to). 

In that period up to July 2024, reported emissions data can be either:

• Primary data provided by suppliers (operators of the installation producing the good), calculated according to approved CBAM methodologies; 
• Default values (secondary data, i.e. estimates) provided by the European Commission (expected at the end of 2023 or early 2024).

But, for the next reporting periods (31st July 2024 onwards), requirements become more stringent, and the previously-accepted default values will not be accepted (unless they’re only used for up to 20% of the emissions of complex goods).

In summary: this time next year, importers will face fines if they don’t get hold of primary emissions data from their suppliers. 

Each Member State will set its own fines, which are expected to be between 10-50 EUR per tonne of emissions not reported. For a single consignment of 1,000 tonnes of aluminum from South Africa imported into the EU, the fine could be upwards of 100,000 EUR depending on where the aluminum is produced. 

Your license to operate relies on CBAM compliance 

The risk is material. Companies who fail to obtain primary supplier data from their Q3 2024 CBAM report onwards could have their ability to import goods into the EU challenged from 2026.

In the nearer term, importers could have their goods stopped at the EU border if they don’t register to be an authorized CBAM declarant by 31^st December 2024.

That’s because if importers don’t pass the test of transitional period and they rack up fines, they face a very real risk of having their status as an authorized CBAM declarant revoked — meaning they would no longer be allowed to import the steel, aluminum, iron, electricity, hydrogen or fertilizer products currently covered under CBAM. Indeed, this list will grow as the scope of CBAM expands.

Supplier engagement is more critical than ever

• For most importers, CBAM reporting will require a supplier carbon engagement strategy at a scale never seen before. 
• For installations, CBAM means a complex process of carbon accounting that many will not be prepared for. 
  

Without direct incentives or penalties for installations, it’s up to importers to ensure their suppliers do what’s needed. The question to ask suppliers isn’t just ‘Are you measuring emissions at all?’ but ‘Are you measuring emissions in the right way for CBAM purposes?’ The methodologies approved by the European Commission do not, for instance, fully reflect the internationally accepted Greenhouse Gas Protocol, which some producers might be following for other purposes. 

And while one year might seem a long time, measuring product-level emissions on the ground is certainly not an overnight job.

Prepare now; avoid the scramble for data

The sooner importers rise to that challenge and start gathering supplier data, the less likely it is that they’ll run into issues in Q4 next year. 

At CarbonChain, we’re seeing leading companies getting ahead; starting to track supplier engagement and helping their suppliers embed CBAM-approved carbon accounting into their facilities now. 

They’re working with suppliers as much as possible to obtain primary data to use from the very first report in January. They’re not risking sending a last-minute mass supplier request in October 2024 and scrambling to obtain primary carbon data. 

Importers have a unique window of opportunity; effectively, a grace period to practice CBAM-ing and get that complex supplier tracking process in place, ideally automating it in time for October 2024. Those who over-rely on default values and postpone supplier engagement for as long as possible will be left unprepared when estimates are no longer accepted. 

The European Commission will let importers amend their first three reports until July 2024, if better data becomes available from suppliers. We see this as one of the clearest signals from the EU that their expectation is not for importers to sit on their hands for a year using default values. Rather, they expect importers to be proactively transitioning towards full use of primary data, and working with suppliers to improve data quality.

Will the EU really be so harsh?

Given the compliance challenges — and the EU’s recent communication delays and backtracks on some CBAM rules — some wonder whether the EU will actually implement the penalties in the transitional period, or whether we’ll see some more leniency (beyond the existing promise that companies will have a chance to update their data before being issued with fines).

However, any further leeway is likely to be extremely short-lived. The EU has critical net-zero goals to meet as part of its law-enshrined Fit for 55 package — for the planet and for its legitimacy as a world-leading jurisdiction on sustainability and climate. CBAM is an integral policy, and analysts have already accused it of not going far enough. 

Go beyond CBAM, before your competition

CBAM is here to stay. The first reporting deadline is an opportunity to take control. If you don’t get it right, your competitors will — and they’ll use CBAM compliance as a catalyst for differentiation. 

How? Tracking emissions for CBAM is a headstart towards fulfilling customer demand for full product carbon footprints (PCFs) and life cycle assessments (LCAs). Knowing your supplier emissions also reveals carbon hotspots to reduce, and helps you get ahead of corporate emissions disclosure regulations. 

We mentioned earlier that it’s the importers who will be punished. But suppliers too will face penalties. Whether directly from emerging carbon pricing in their own jurisdictions, or indirectly by failing to offer carbon data transparency and losing customers to competitors. 

Ultimately, it’s not only about market share for EU exports. Carbon regulation is tightening worldwide and we are seeing advances in similar border adjustment regulations, such as the US’ PROVE IT Act, and carbon pricing schemes, such as in Japan. The EU’s CBAM is just the beginning.

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• CarbonChain sets companies up for CBAM success. Our all-in-one software solution enables declarants to engage suppliers and report emissions, and supports suppliers with carbon accounting. Schedule a call.