The EU's Carbon Border Adjustment Mechanism (CBAM)

The CBAM is not officially a carbon tax. However, from 2026 it will function in similar ways to a carbon tax, by requiring companies to make financial payments (or 'adjustments') according to the greenhouse gas (GHG) emissions embedded in their imports of aluminum, steel, fertilizers, electrical energy, hydrogen and cement. Importers will report these emissions, then purchase and surrender CBAM certificates at the same cost per tonne of carbon dioxide equivalent as the average EU ETS carbon price for the past week.

The CBAM regulation has been officially passed and has entered into force. It was published in the Official Journal of the EU on 16 May 2023. The transitional phase will begin on 1 October 2023 and the permanent system enters into force on 1 January 2026.

The CBAM covers high-emitting commodities including electric energy production, cement, aluminum, fertilizers, iron, steel and hydrogen. Certain precursors and other downstream products like screws and bolts are also included. Learn how CBAM impacts metals trade (steel and aluminum).

Not sure if your goods are covered by EU CBAM?

• Check our quick guide to CBAM products and CN codes
  

The EU Emissions Trading System (ETS) sets a cap on the amount of greenhouse gas (GHG) emissions that can be released from industrial installations in certain sectors within the EU. Allowances are bought on the ETS trading market.

The CBAM complements the EU ETS by covering goods imported from outside the EU. When fully phased in, will cover more than half of the emissions in ETS-covered sectors. Unlike the ETS, there will be no 'cap and trade' system under the CBAM.

The CBAM certificate prices will mirror the EU ETS price (averaged on a weekly basis).

During the transitional period, importers must report the indirect emissions of all goods.

After the transitional period (from January 2026), a carbon price will apply to indirect emissions from the following goods:

Explore our analysis of the costs of the CBAM with and without indirect emissions for aluminum and steel.

In the CBAM transitional period implementing regulation, upstream emissions are included for certain goods only: i.e. complex goods.

The difference between a simple and complex good under the EU CBAM:

A simple good doesn’t have any embodied emissions from upstream materials or energy sources. The only emissions associated with a simple good are those directly related to its production process.

A complex good on the other hand does have some embodied emissions from upstream materials.

In the case of aluminum, aluminum ingot is a simple good: emissions from the production of bauxite, alumina, anodes, and all other materials and energy used in the production of the ingot are not included in the calculation of carbon emissions.

Products that use aluminum ingot as an input are complex goods: the production of the ingot needs to be included in the calculation of the carbon emissions associated with these products.

National Competent Authorities (who can authorise importers as CBAM declarants) are provisionally as follows, as of 21 December 2023. Contact details and more information are available here.

Office for the National Emissions Trading System, Customers Authority (Austria)

Federal Public Service for Health, Food Chain Safety and Environment (Belgium)

Executive Environment Agency (Bulgaria)

Ministry of Agriculture, Natural Resources and Environment (Cyprus)

Ministry of the Environment (Czech Republic)

Danish Energy Agency (Denmark)

Environmental Board (Estonia)

Ministry for Ecological Transition and Demographic Challenge (Spain)

Customs Authority (Helsinki)

Département de lutte contre l’effet de serreDirection Générale de l’Energie et du Climat (DGEC) | Ministère de la Transition écologique et cohésion desterritoires (France)

General Directorate of the Financial and Economic Crime Unit | Ministry of National Economy and Finance (Greece)

Customs Administration, Ministry of Finance (Croatia)

National Climate Protection Authority (HU)

Environmental Protection Agency (Ireland)

Ministry of Environment and Energy Security (Italy)

Administration de l’environnement (Luxembourg)

Valsts ieņēmumu dienestsState Revenue Service (Latvia)

Malta Resources Authority (Malta)

Dutch Emissions Authority (The Netherlands)

National Centre for Emissions Management (Poland)

Portuguese Environment Agency (Portugal)

Ministry of Finance (Romania)

Swedish Environment Protection Agency (Sweden)

Ministry of Environment of the Slovak Republic (Slovakia)

The UK CBAM is a separate but similar mechanism to address carbon leakage. Learn more about the UK CBAM.

Official default values for CBAM are now available on the transitional registry. These are global average values for each CN (product) code.

Key things to note:

1. Importers can use these defaults if suppliers don’t provide data until 31 July 2024 (i.e. for the first three reporting quarters)
2. Suppliers can use default values for 100% of emissions until 31 July 2024 (same as importers) and long term if those default values make up less than 20% of emissions (in practice, this means using them for precursor goods when the installation makes complex goods)
3. Other default values (i.e. not from the CBAM registry) can be used on the condition that the reporting declarant indicates and references the methodology followed for establishing such values
4. The EU aims to set default values higher than the average actual values, in order to encourage the use of actual values in reporting
   

During the transition period (until 1 January 2026), importers will face fines for not declaring emissions or for under-declaring emissions.

The exact fines are to be determined, but will be between 10-50 euros per tonne of carbon dioxide equivalent not declared or under-declared.

Until July 2024, importers can declare using default values, but after that, primary data will be needed (unless for up to 20% of precursor emissions where those are covered by CBAM), in order to avoid fines.

The EU CBAM does not use the categories of Scopes 1, 2 and 3. Therefore it can be misleading to talk about Scope 3 emissions being included in CBAM. However, certain emissions that fall under the Scope 3 category are included in specific ways.

CBAM classifies emissions as either direct emissions or indirect emissions, while traditional corporate carbon accounting classifies emissions by Scopes.

In CBAM, direct emissions refer to emissions from the facility’s own operations, while indirect emissions refer to the generation of electricity to produce goods in that facility (whether that electricity is generated on-site or off-site). 

‍💡 Note: under the ‘Scopes 1, 2 and 3’ framework, on-site generation of electricity is categorized as Scope 1 (direct) emissions, not Scope 2. This can be a source of confusion for companies who have already calculated emissions according to Scopes or who use ‘direct emissions’ synonymously with Scope 1.

For so-called complex goods, additional upstream emissions (outside of electricity generation) are also included under CBAM: specifically, emissions involved in the processing of raw materials that are used as inputs to make those complex goods.

Those emissions do fall under the Scope 3 category of standard carbon accounting. For example, in the case of steel sheets, the emissions of precursor goods like sinters and pellets need to be included in CBAM reporting, and are part of the steel sheet's Scope 3.

However, the category of Scope 3 emissions includes many more emissions sources than just the direct processing of precursor goods. Therefore, CBAM counts fewer emissions than a full Scope 3 accounting exercise would, even in the case of complex goods.