CBAM: 4 key pillars of preparation


The European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a bold step towards climate-conscious trade and production. Its objectives aim not only to reduce carbon leakage but also to establish a fair global carbon market. However, as a complex unilateral administrative framework, the CBAM places significant reporting requirements on the industries it covers, presenting both challenges and opportunities. These obligations demand precision and attention to detail, as the data will not only determine the payable CBAM Certificates, but also form the basis of accurate carbon accounting and carbon tax exposure measurements. A key component of this process is the ability to precisely calculate direct and indirect emissions since they both are directly related to expenditures. This requirement underscores the importance of sophisticated and reliable measurement methodologies and, in some cases, may require investment in new integral and automated technology. Equally crucial is the obligation to report on carbon prices paid abroad, a task that necessitates a keen understanding of foreign jurisdictions’ carbon pricing systems.

Penalties for non-compliance add another layer of complexity and risk. The CBAM mandates financial penalties for any inaccuracies or omissions in reporting, thus reinforcing the need for thoroughness and diligence. The requirement for third-party verifiers to inspect the reports further underscores this need for precision.

To navigate this transition successfully, companies need to prioritize digitalization of invoices, automatization of reporting requirements and build up expertise in international carbon pricing diligence. When all facets of the quarterly CBAM reporting are compliant, the company must start managing its carbon tax exposure as soon as possible, since free allowances start to be phased out starting from 2026.

EU companies must embrace low carbon energy and cleaner processes to not only survive but achieve a long-lasting competitive advantage. It’s now or never.

To navigate the CBAM transition effectively, businesses need to concentrate on 4 key areas:

1. Reporting Responsibilities

The CBAM will apply to imports from non-EU countries, excluding those covered by the EU ETS or equivalent agreements such as Iceland, Liechtenstein, Norway, and Switzerland. However, third countries with equivalent domestic carbon pricing mechanisms may apply for exclusions from the CBAM to maintain compatibility with the European Union’s World Trade Organization (WTO) obligations.

Only “authorized CBAM declarants” are permitted to import covered products under CBAM, meaning each EU company importing CBAM goods is required to register as such to its competent national authority by the end of 2024.

Each reporting entity must deliver comprehensive quarterly reports to the newly established “CBAM Transitional Registry”. These reports should detail the total quantity of each product type, the product’s country of origin, the production route, and the total embedded emissions. Specifically, for steel goods, the identification number of the steel mill where the batch of raw materials originated is also required. The first of such quarterly reports is due by January 2024.

2. Calculation Methods for Direct and Indirect Emissions

During the first year of implementation, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method); (b) reporting based on equivalent third country national systems; and (c) reporting based on reference values. As of 1 January 2025, only the EU method will be accepted.

The calculation methods for direct and indirect emissions are crucial for businesses to precisely understand their carbon footprint. For direct emissions, companies can either use the calculation-based method, which determines emissions from source streams based on activity data, or the measurement-based method, which identifies emission sources through continuous greenhouse gas concentration measurement.

Indirect emissions, on the other hand, are calculated using rules specified in the draft implementing regulation. The goal during the transitional period is to gather data that will inform the methodology for the calculation of embedded indirect emissions.

Download here the specific emission measurement rules for international installations

3. Reporting on Carbon Prices Paid Abroad

The CBAM Regulation acknowledges that jurisdictions outside the EU have their own carbon pricing systems. Businesses are required to report various elements of these foreign systems, including the amount paid in the country of origin, the emissions covered by the carbon price, the form of the carbon price, information on rebates and free allocations, and legal provisions regarding pricing and compensation.

This section is of fundamental importance since carbon taxes paid abroad are deductible from the CBAM emission allowance price and more national carbon pricing mechanisms are expected to arise in the coming years, even in China. More about this in our dedicated article.

4. Penalties for Non-Compliance:

Non-compliance with CBAM reporting requirements may lead to financial penalties, varying between €10 and €50 per ton of CO2e. However, it’s likely that the EU may initially be lenient with incomplete reports.