The EU’s Carbon Border Adjustment Mechanism (CBAM) imposes a carbon price on imports to create a level playing field for EU producers and encourage global emissions reduction. This mechanism targets imports from countries outside the EU Emissions Trading System (ETS) to prevent Carbon leakage — which happens when businesses relocate production to regions with less stringent environmental regulations, undermining the EU’s climate goals.
The transitional phase of CBAM began on October 1, 2023, with reporting requirements starting in January 2024 for certain products like cement, steel, and fertilisers. During this phase, importers must report the embedded emissions in their goods, preparing for full implementation by January 2026, when financial obligations will require them to purchase CBAM certificates to account for the carbon emissions embedded in their imported goods.
CBAM certificates are designed to accurately reflect the carbon expenses paid by EU producers under the EU Emissions Trading System (ETS). This approach ensures that imported products face a similar carbon pricing standard, promoting fair competition and aligning global trade practices with the EU’s climate policies. Some details might still change in the course of negotiation and after the transition period ends in 2026.
In this article, you will learn about the ETS, the goal, scope and obligations of CBAM, as well as the role of digital solutions in complying with CBAM.
- Why do we need the CBAM?
- Explaining the ETS
- An ideal example of an emissions trading system
- Loopholes of the EU ETS: CBAM as a solution
- What is the scope of the CBAM?
- What are the obligations of the CBAM?
- Cost of the tariff
- Definition of ‘embedded emissions’
- Obligations for importers
- How digital solutions support compliance with the CBAM
Why is the CBAM necessary?
The EU aims to reduce emissions by at least 55% by 2030 and become climate-neutral by 2050. To reach these goals, the EU has created a variety of climate change measures. One of the most prominent initiatives is the EU Emission Trading System (ETS). The CBAM was created to address and balance some of the perceived disadvantages of the ETS. So, to understand the rationale behind the CBAM, it is important to first comprehend what the ETS is.
Interested to know about corporate net zero commitments in addition to policy measures? Read our extensive overview of Scope 1, 2, 3 emissions.
Explaining the EU Emission Trading System (ETS)
The EU Emission Trading System (ETS) incentivises carbon emitters to reduce their emissions by creating a carbon market with a cap & trade system. This means there is a limit on the total amount of greenhouse gases that companies can emit each year. This system is monitored through a fixed number of allowances distributed to companies, which they must use to cover their emissions.
If a company exceeds its carbon allowance and does not have enough credits to cover the excess, it has two options: to reduce its emissions or to purchase additional allowances from another company that has reduced its emissions and no longer needs its surplus credits.
This trading system determines the market price of carbon and creates financial incentives for companies to reduce emissions to lower costs. Companies that fail to cover their emissions with allowances face significant fines. This cap decreases over time to encourage reductions in overall emissions, which is why companies should focus on emission reductions to avoid these penalties.
Watch the video to further understand the concept.
The EU Emissions Trading System explained
Currently, the ETS covers CO2 produced from:
- Electricity and heat generation and
- Energy-intensive industries, including
- Oil refineries
- Steelworks
- Production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals
- Commercial aviation within the European Economic Area
Loopholes in the EU ETS: CBAM as a solution
In a perfect world, carbon markets would be global, and emissions trading could happen between richer countries with high costs for polluting and poorer countries with more affordable emissions reduction measures. Such a global distribution is estimated to reduce the price of fulfilling the Paris Agreement by 79%. Another important advantage of a global scheme is that it restricts polluters from moving to jurisdictions not covered by the carbon markets. The ETS, however, is a regional scheme and suffers from discrepancies in coverage across countries.
The regional nature of ETS gives rise to ‘carbon leakage’ — where it is cheaper to source goods from a region with less regulation or when EU companies move abroad for more lenient climate standards1.
Ultimately, carbon leakage undermines many climate change initiatives, and the CBAM is designed to tackle this issue. By imposing a tariff on the emissions embedded in goods produced outside the EU’s emissions trading system (ETS), the CBAM helps equalise the carbon price for imported products. This ensures that goods entering the EU bear the same carbon costs as those produced within the ETS, addressing the risk of carbon leakage and promoting fair competition for EU businesses.
What is the scope of the CBAM?
The CBAM applies to goods produced in non-EU countries. This includes:
- Goods wholly produced outside the EU
- Goods that underwent their last, substantial production phase outside the EU (in cases where production involves more than one country)
The CBAM aims to gradually affect the import of all goods covered by the ETS by 20306. During the transition period from October 2023 to January 2026, the CBAM obligations is still only limited to reporting and will apply to goods with high chances of carbon leakage6 such as:
- Iron and steel
- Cement
- Aluminium
- Fertilisers
- Electricity
- Some downstream products containing iron and steel (such as screws and bolts)
- Some chemical elements (hydrogen and precursors)
But from 2026, importers will start paying for adjustments. The European Commission will evaluate other high-risk products to be added to the CBAM. Such products might include organic chemicals, polymers, and downstream goods. The Commission will also look into including indirect emissions in the requirements.
Between 2030-2032, the mechanism is expected to be fully implemented. At this point, all goods covered by the ETS will be included in the CBAM.
What are the obligations of the CBAM?
The CBAM forces importing companies to purchase CBAM certificates to pay the difference between the carbon price in the country of production and the EU1. The costs will not apply if the importer can prove that the producer has paid a corresponding price in a non-EU country7.
Cost of the tariff
With the CBAM certificates, importers will have to pay the same amount per tonne of CO2 emitted, as if the goods had been made in the EU. The price of the certificate will be defined by the weekly average auction costs of emission allowances under the ETS.
The CBAM certificates include the price of the goods’ embedded emissions but what exactly are these emissions?
Definition of ‘embedded emissions’
The regulation defines embedded emissions as the direct greenhouse gas emissions from the manufacturing of goods, calculated according to methods set out in Annex III of the CBAM regulation1. Direct emissions are those generated from activities a manufacturer owns or controls.
The European Commission is considering adding indirect emissions to the embedded emissions to be calculated6. The authorities will look into methodologies to include additional emission types after the end of the transition period in 2026.
Read our article to find out more about direct and indirect emissions, as defined by the Greenhouse Gas Protocol.
Obligations for importers
To pay the difference in carbon prices for embedded emissions between a third country and the countries covered by the EU ETC, the importers will have to:
- Register with the national authorities before importing the goods
The application should include such information as certification by a tax authority, declaration of honour, and volume of imported goods.
- Declare the number of imported goods and their embedded emissions annually
The declaration should made by the 31st of May of the year preceding the import, and include data on the number of goods, total embedded emissions, and total amount of CBAM certificates.
- Attain the necessary amount of CBAM certificates
The certificates should offset the declared embedded emissions.
- Maintain the compliance documentation
At the same time, to ensure the fulfilment of the obligations of importers, the EU will assign CBAM authorities. These representatives will:
- Authorise registration in the CBAM system and assign to each authorised declarant a unique CBAM account number
- Review import declarations
- Sell CBAM certificates
- Establish a national registry of declarants containing the data regarding the CBAM certificates
- Cancel or re-purchase the extra certificates from importers by June 30th each year
Calculation of embedded emissions, however, is a significant undertaking and requires large-scale data management efforts, but several digital solutions can assist with compliance.
Calculating embedded emissions is a complex and resource-intensive process that requires large-scale data management efforts. Tracking emissions throughout the entire supply chain, from raw materials to production and distribution, demands significant effort and coordination. However, several digital solutions are available to streamline this process and help businesses comply with the Carbon Border Adjustment Mechanism (CBAM) and other sustainability regulations. These tools can simplify data collection, automate reporting, and improve accuracy, easing the burden of compliance while enhancing sustainability efforts.
How digital solutions support compliance with the CBAM
According to the regulation, the embedded emissions of goods outside of the EU must be declared before being imported8. Due to the complex nature of modern supply chains, this might bring challenges associated with the inaccessibility of information, confidentiality concerns, errors, and lack of scalability. The issue will become more prominent when the European Commission adds indirect emissions to the scope, which will demand wide-scale data exchange between supply chain actors.
Digital traceability solutions make the emissions accounting process for the CBAM easier.
- First, they enable companies to track products throughout their lifecycle, giving a full overview of the product's history. Different traceability solutions have various specialisations: some are supply chain agnostic, while others focus on certain groups of goods. The product’s history usually includes the composition, origin of materials and parts, the processing history, the distribution and location of the product after delivery, as well as its quality and safety.
- Second, digital traceability tools collect the data necessary for emissions calculations. From a single place, firms can generate product life cycle emission reports to be integrated into the CBAM declarations and other corporate accounts fuss-free.
- Third, digital systems establish a scalable information exchange system and eliminate the need to share emissions data manually through numerous files and surveys.
Want to better understand what ‘traceability’ is? Read our article about the 2 levels of supply chain visibility.
One of the digital solutions available is Circularise’s Digital Product Passports. The software can trace the history of the product, including its emissions. Each physical good gets assigned a passport that moves through the whole supply chain, with key information about the product added to the record at each step. Compared to other traceability tools, Circularise’s software comes with an added layer of confidentiality. With Circularise’s proprietary Smart Questioning encryption technology, supply chain actors can share key insights about the manufacturing process, without revealing sensitive data. The tool ensures that no central party can alter the record, crucial for enabling indirect suppliers to share emissions data, and promoting trust and transparency across the supply chain.
Read more about Circularise’s Digital Product Passports for suppliers and manufacturers or brands and Original Equipment Manufacturers (OEMs).
About Circularise
Circularise is the leading software platform that provides end-to-end traceability for complex industrial supply chains. We offer two traceability solutions: MassBalancer to automate mass balance bookkeeping and Digital Product Passports for end-to-end batch traceability.
Circularise is the leading software platform that provides end-to-end traceability for complex industrial supply chains. We offer two traceability solutions: MassBalancer to automate mass balance bookkeeping and Digital Product Passports for end-to-end batch traceability.
Your first step towards product traceability
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