In May of 2022, the European Parliament officially approved its Carbon Border Adjustment Mechanism (CBAM) to charge carbon-intensive imports for their emissions. Before it can determine fee structures for individual products, the EU must establish clear guidelines on the information that importers are required to report about their goods.
On June 13, the EU published a draft Implementing Regulation, which includes the first description of these specific requirements. The Regulation will guide the CBAM transition phase from October 2023 through 2025. This window will serve as both an adjustment period for importers and an assessment period for EU lawmakers. As such, the functionality of these reporting requirements is the first litmus test for the merit of carbon-intensity import fees—the most comprehensive tool to address climate concerns through trade.
With the first reporting period fast approaching, this analysis summarizes the nuts and bolts of the CBAM’s transition phase.
Key takeaways:
- The first CBAM reports must be submitted by January 31, 2024, for all covered imports between October 1 and December 31, 2023.
- The CBAM report requires declarants to report extensive information about manufacturing processes and data collection methods. During the transition period, more leeway will be given to emissions monitoring, reporting, and verification (MRV) methods that diverge from the two standard EU approaches.
- Failure to report or make corrections to submitted CBAM reports could result in hefty fines. These fines could begin from the first reporting period, although declarants will have the chance to modify their reports to comply with reporting requirements.
What is the timeline? Declarants must submit their first emissions report by January 31, 2024, for all imports into the EU that take place in the fourth quarter of 2023. As a general rule, declarants must submit the CBAM report to the CBAM Transitional Registry, a publicly accessible inventory, no later than one month after the end of each quarter. The first two CBAM reports, however, may be modified until the submission deadline for the third report in July 2024.
Which goods, which gases, and which products? Importers will need to report on the following.
- Iron and steel (CO2): sintered ore, pig iron, specific alloys (FeMn, FeCr, and FeNi), crude steel, various iron and steel products (bars, rods, wire, etc.).
- Aluminum (CO2 + PFCs): Unwrought aluminum, various aluminum products (plates, tubes, foil, etc.).
- Cement (CO2): calcined clay, cement clinker, aluminous cement, various types of cement (White Portland, hydraulic, etc.).
- Fertilizer (CO2 + NO2): Nitric acid, Urea, Ammonia, mixed fertilizers.
- Electricity (CO2)
- Hydrogen (CO2): only the production of pure hydrogen or mixtures of hydrogen with nitrogen usable in ammonia production.
What information is required? For each good, declarants will have to provide the following.
- The country of origin.
- The specific installation where the good was produced.
- The specific emissions associated with the manufacturing of the good.
- The emissions associated with the generation of purchased electricity and heat. Declarants can choose their own calculation methodology, but they must report the default values and emissions factors that were used within calculations of electricity and heat emissions, as well as the resulting quantity of indirect emissions.
- Previously paid carbon prices, including the form of carbon price, legal implementing act, quantity of emissions covered by the price, and monetary amount covered by price.
- Precursors – intermediate products that are used as inputs in the production of other goods. Declarants must include the emissions associated with precursors for specific iron and steel, aluminum, cement, and fertilizer products.
- Production routes – the specific manufacturing process of a good. The Regulation’s Annex specifies the specific steps of different production routes that are covered under the CBAM. Declarants are required to report the emissions associated with these steps.
Which emissions monitoring methodologies are permissible? Operators may use either a calculation-based or measurement-based approach to track emissions data. The chosen method must maximize the consistency, comparability, transparency, completeness, integrity, and accuracy of data collection. Although the Regulation encourages rigorous data collection where possible, it also offers considerable flexibility during the transition phase.
- Until July 2024, declarants outside of the Schengen area may use their own stated method for data collection, so long as it leads to a similar level of coverage and accuracy.
- Until December 31, 2024, declarants may use a data collection method that is established under a carbon pricing scheme, emissions reduction project, or other mandatory monitoring scheme in the jurisdiction where the product is manufactured.
- Calculation-based methods may use default values through 2024 for input materials or subprocesses that contribute to less than 20% of the total emissions of a complex good.
How does reporting work? An importer can submit a CBAM report either directly or through an indirect customs representative. The report must follow a specific report structure and is uploaded to the CBAM Transitional Registry, a standardized and secured electronic database. The Registry balances case handling with confidentiality by only allowing data access to the Commission and the competent authority of the receiving country.
What will enforcement look like? In the transition phase, penalties will be imposed on declarants who have not submitted a report or have not taken steps to correct their reports when they do not meet the necessary requirements. The specific fee is largely left to the discretion of the competent authority in the receiving country, who will consider factors such as the extent of unreported information, previous noncompliance, and attempts to correct mistakes moving forward. The penalties will range from EUR 10 to EUR 50 for each ton of unreported embedded emissions. Reports that remain non-compliant for over six months may be subject to larger fines.