The Carbon Border Adjustment Mechanism (CBAM) or also CO₂ limit compensation system is part of the European Union's "Fit for 55" package and aims to reduce greenhouse gas emissions in international trade. Essentially, it is a mechanism for assessing and taxing the carbon footprint of goods imported into the EU. The aim is to ensure that importers of goods into the EU comply with the same environmental requirements as domestic manufacturers. CBAM is therefore intended to Preventing the relocation of CO₂ emissions. Carbon leakage occurs when industries relocate their environmentally harmful production to other countries with less stringent climate policies or when more carbon-intensive imports replace EU products. The European Union also expects additional effects from the introduction of CBAM. An optimization and efficiency increase in the production processes of companies within the EU, a promotion of clean industries in non-EU countries and overall fairer prices in global trade for CO₂-intensive products.
How the CBAM CO₂ limit adjustment system works
When importing certain goods that were manufactured outside the EU, the CBAM requires a CO₂ price fixedwhich is based on the carbon emissions generated during their production in the country of origin. This price is based on the average weekly prices of the EU ETS. Just as in intra-European certificate trading, CBAM certificates must then be purchased and redeemed for the imported goods. However, the difference between CBAM and EU ETS certificates is that when the goods are declared to customs, the CBAM certificates are reduced by the amount that has already been incurred for the emission in the country of origin. In the first step, this applies to CO₂, N₂O and HFC emissions resulting from the carbon-intensive production of cement, iron & steel, aluminium, fertilizers, hydrogen and electricity.
CBAM responsibilities
The imported goods are checked by the national customs authorities and the calculation of the quantity of CBAM certificates required, the Importer make. They must always hold and redeem at least 80 % of the certificates and submit and settle the final statement on May 31 of the following year. If they should too many certificates purchased, these can be returned until June 30 and the the purchase price at the time will be refunded. However, this is only possible up to a maximum of 33 % of the surplus certificates. All certificates exceeding this amount expire and cannot be transferred to the following year. Company buyers should therefore calculate their necessary imports carefully and determine exactly how high the CO₂ price already paid in the country of production was. If producers in third countries are unable to provide data on CO₂ pricing, the EU Commission has Benchmark values for product groups and countries of origin defined.
Introductory phase of CBAM since October 1, 2023
The CBAM CO₂ border adjustment system will be introduced gradually. During the introductory phase, which began on October 1, 2023 and will last until the end of 2025, companies will initially only have to calculate the direct and indirect CO₂ emissions of imported goods and record them in a quarterly report. This must be submitted by the end of January 2024. From 2025, the obligation for CBAM declarants to register with the respective customs authorities will come into force and from 2026, CBAM certificates must be purchased for the emissions generated, meaning that the implementation phase will be completed by this time. At the same time, the free allocation of EU ETS allowances will be gradually abolished from 2026 until 2034 and the entire system will be extended to other sectors.
Fairer competitive conditions
In summary, the CO₂ limit compensation system CBAM will ensure fair competitive conditions in climate protection for energy-intensive sectors and it even has the potential to reduce greenhouse gas emissions in global trade. In Europe, companies should be given more planning security and carbon leakage avoided. Nevertheless, German industry emphasizes the importance of ensuring that European climate protection measures do not lead to international competitive disadvantages, especially as many affected companies are not yet sufficiently prepared to collect all the necessary data. In addition, the central import and export sides as well as multilateral climate agreements should be considered separately. At the same time, it is pointed out that CBAM regulations must not interfere with established customs procedures.