CBAM – What the EU’s new Carbon Border Adjustment Mechanism means for companies
The relocation of emissions abroad is a growing problem for the EU’s climate protection efforts. When companies relocate their production to countries with less stringent environmental regulations, this undermines the EU’s efforts under the Green Deal. To prevent this, a solution must be found that enables a price adjustment for goods produced abroad, thereby creating fair market conditions for producers within the EU. This is precisely where the Carbon Border Adjustment Mechanism (CBAM) comes in.
The CBAM aims to equalize the CO2 costs of imported goods and goods produced in the EU and thus prevent emissions from being relocated abroad (“carbon leakage”). The mechanism ensures that foreign producers pay a comparable CO2 price to EU producers under the EU Emissions Trading System (EU ETS). In addition, the CBAM supports the transition to lower-emission production processes, as it is linked to the end of the free allocation of emission allowances.
Which products are affected by the CBAM?
Six key product categories that are considered particularly emission-intensive are currently affected by the CBAM. These categories are therefore particularly susceptible to the relocation of emissions to countries with lower environmental requirements.
During the transitional phase of the CBAM regulation, it applies to six product groups classified according to the CN (Combined Nomenclature) codes. These CN codes are used as commodity codes for exports outside the EU and provide a standardized classification for international trade goods. The product groups concerned include aluminum, cement, chemicals, electricity, fertilizers, iron, and steel.
At the end of the transitional phase, the EU plans to possibly include further product groups in the scope of the CBAM. This is to ensure that the mechanism remains flexible and can be extended to other emission-intensive products if necessary.
How does the CBAM work?
The CBAM requires importers to report regularly and in detail on the CO2 emissions of their imported goods. These reports serve as a basis to ensure that the CO2 content of the goods is calculated and taxed correctly. Both direct and indirect emissions are taken into account.
Direct emissions: The calculation of direct emissions is based on the actual emissions generated during production and is combined with the production volume. If not all the required data is available, standardized values can be used in the transitional phase.
Indirect emissions: These include emissions that do not occur directly within the production process, but are caused by upstream processes such as electricity consumption or the production and transportation of raw materials. Default values are often used for the calculation, as it is often difficult to obtain precise primary data for these embedded emissions. This nevertheless enables a reliable estimate of the total emissions balance of the imported product.
Based on the calculated emissions data, importers can purchase the required number of CBAM allowances. These are issued by the EU and their price is based on the weekly average price of the auction prices for EU ETS allowances. However, the mandatory purchase of allowances will not begin until the end of the transitional phase in 2026. This transitional phase will serve to gradually introduce importers to the new requirements while also enabling the collection of product carbon footprint data, which will help the EU to implement the mechanism. The CBAM will then be fully introduced from 2026.
Importers must submit a quarterly CBAM report detailing the quantity of imported goods and the corresponding direct and indirect emissions. This must be submitted no later than 30 days after the end of the quarter. After the CBAM transitional phase, the reporting system will be adapted. From 2026, with the so-called implementation phase, an annual CBAM report will be required. This summarizes the quantity of imported goods and the corresponding emissions and ensures that the necessary emission allowances have been purchased. In addition, the report must state whether and to what extent the importer has already paid a CO2 price in the countries of origin. The annual declaration is due by May 31st of the following year and must be assessed by an external auditor.
CBAM timeline
The CBAM entered a transitional phase in October 2023, which will last until the fourth quarter of 2025. The reports must be submitted via the EU transitional register. A correction period of six months after submission applies to the first two reports. It is important to note that the reports do not have to be audited during this transitional phase. This gives companies the opportunity to gradually adapt to the new reporting obligations without being subject to an audit by an independent third party.
The implementation phase will begin in 2026, during which the full CBAM regulations will be gradually introduced until 2034. During this phase, importing companies are obliged to report the quantity of imported goods and the CO2 emissions they contain. At the same time, the corresponding emission allowances must be deposited to cover the CO2 equivalents of the imported products.
The CBAM will come into full force after 2034. From this date, the mechanism will apply to the entire portion of emissions that does not benefit from the free allowances of the EU Emissions Trading System (EU ETS).
Is your company ready for CBAM?
As your partner on this journey, Horváth offers you the necessary support and expertise to successfully implement the CBAM regulatory requirements. Our approach to achieving CBAM compliance and embedding it in the organization is based on a structured five-phase model. This model includes a detailed analysis of the status quo, the definition of necessary measures, and the implementation of a tailor-made concept for data queries, supplier management, and organizational anchoring. Our approach is rounded off by establishing an efficient reporting process. Find out more about our Sustainability & Green solutions or contact our experts.
