From October the 1st, 2023, the transitional phase of the Carbon Border Adjustment Mechanism (CBAM) came into effect. CBAM entails importers paying for CO2 emissions generated while producing goods outside the EU. This involves levies on CBAM goods, primarily industrial products such as steel, cement, fertilizer, and electricity. The complete list of goods is outlined in Annex 1 of the Regulation.
To combat global warming, the European Union has set several goals. One is reducing European CO2 emissions by at least 55% by 2030 compared to 1990 levels. This marks the first step toward the ultimate goal of a carbon-neutral Europe by 2050.
Laws and regulations have been established to reduce CO2 emissions across the entire economy to achieve these targets. One example is the emission trading system, where energy-intensive sectors must purchase permits to emit CO2.
Carbon Leakage
But what about companies or producers of goods outside the EU? As long as there are countries with lower climate ambitions than the EU, there's a risk of 'carbon leakage.' Carbon leakage occurs when companies or sectors, due to higher costs from climate policies, decide to move their production to other countries or areas outside the union where regulations are less stringent. Or if comparable products with higher CO2 emissions are imported. Such a situation could lead to a global increase in CO2 emissions, counteracting efforts to promote sustainable production. So, as the European Union raises its climate ambitions, it must ensure that the risk of 'carbon leakage' doesn't hinder these ambitions.
With CBAM, the EU aims to make producers pay for emission rights for products imported from outside the EU, thus mitigating the risk of carbon leakage. This prevents producers within the EU from being at a competitive disadvantage compared to the import of similar products from countries with lower CO2 emission costs. An expected outcome is that countries outside the EU will also transition to more sustainable production practices to facilitate exports to the EU.
What can importers expect from CBAM?
Businesses seek certainty and predictability about these costs in the long term so they can make suitable investments to make their production processes more environmentally friendly. Hence, CBAM is being gradually introduced.
During the transitional phase, importers do not yet have to purchase CO2 permits but are required to submit reports to the European Commission. The company is also obligated to confirm awareness of reporting requirements.
Reporting must be submitted quarterly and should include the quantity of CBAM goods imported during the period and the CO2 emissions associated with these goods.
Starting from January 1, 2026, the overall implementation begins. From then on, importers must register as importers of CBAM goods. In addition to reporting, they are also required to pay for the CO2 emitted during the production of imported goods.
Key dates to keep in mind:
- October 1, 2023 - December 31, 2025: Transitional phase
- January 31, 2024: Deadline for the first CBAM report covering the fourth quarter of 2023
- January 1, 2026 - End of the transition period, start of overall implementation
- January 31, 2026: Deadline for the last CBAM report covering the fourth quarter of 2025
How can Hedgehog Company assist?
The reporting obligation started on October 1, 2023. This means the first report must be submitted by January 31, 2024, at the latest. The Dutch Emission Authority oversees this process and can enforce compliance if importers fail to meet their obligations.
Hedgehog assists companies in fulfilling these reporting obligations. We assess the CO2 emissions from the production of imported goods and prepare the necessary reports.
Additionally, we can provide a cost estimate, enabling importers to anticipate future expenses after the regulation comes into effect and adjust their long-term plans accordingly.
For more information about reporting requirements and the contents of quarterly reports, you can visit the websites of the European Commission or the Dutch Emission Authority.
