27 January 2022

EU Carbon Border Adjustment Mechanism (CBAM): The Compromised Text

imageThe EU Carbon Border Adjustment Mechanism (CBAM) was agreed upon by the European Parliament and the Council of the European Union in December 2022. The compromise text is yet to be formally approved and published in the Official Journal of the European Union before it comes into effect. This article provides a summary of the key elements of CBAM according to the compromise text.

The CBAM will be implemented during a transitional period between October 2023 and December 2025 as a reporting obligation only. The full implementation, which will include the purchase of CBAM certificates and payment for the greenhouse gas emissions embedded in imported goods, will begin on January 2026. 

The CBAM will apply to a variety of products including cement, electricity, fertilizers, iron and steel, aluminum, and hydrogen, as well as some precursors and downstream products. The product scope will be extended in the future with the aim of covering all EU ETS sectors by 2030. The CBAM will cover both direct emissions, such as emissions from production processes, and indirect emissions, such as emissions from the production of electricity used during production processes.

The CBAM will not apply to imports from countries that are covered by the EU ETS or have a domestic ETS fully linked with the EU ETS. Additionally, it will not apply to low-value shipments or goods to be used in the context of military activities.

During the transitional period, importers of CBAM goods or their indirect customs representatives will be required to submit a quarterly report to the European Commission. The report must specify the total quantity of each type of goods imported, the actual total embedded emissions, and the carbon price due in the country of origin. A failure to submit or correct a report will result in penalties. As of January 2025, importers or indirect customs representatives will need to apply for the status of authorized CBAM declarant.

As of January 2026, only authorized CBAM declarants will be able to import CBAM goods into the European Union. Authorized CBAM declarants will be required to submit an annual declaration through the EU-wide CBAM registry. This declaration will specify the total quantity of goods imported, the total embedded emissions, and the total number of CBAM certificates to be surrendered. Authorized CBAM declarants will also need to ensure that the total embedded emissions declared in their declaration matches the verified emissions and provide a copy of the verification report.