What is CBAM?
The Border Carbon Adjustment Mechanism (CBAM) is a tool for taxing carbon emissions per product produced in energy-intensive sectors such as Cement, Iron-steel, Aluminium, fertilizer, Electricity, and Hydrogen.
In other words, CBAM is an environmental policy instrument created to achieve the European Union’s climate neutrality goals by reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and becoming climate-neutral by 2050, as set out in the European Green Deal.
The Border Carbon Adjustment Mechanism Transition Period
The Transition Period, defined as the beginning of CBAM, covers the period from October 1, 2023, to December 31, 2023. During the transition period, authorized importers in the EU are required to calculate and report the carbon footprint per product of carbon-intensive products imported into the EU on a quarterly basis.
The Border Carbon Adjustment Mechanism Definitive Period
Following the transition period, the Definitive Period will commence in 2026. EU-authorized declarants will purchase CBAM certificates for the embedded emissions of the goods they import and deliver them at the border. Reporting requirements will continue during the Definitive Period.
What is Carbon Leakage?
Carbon leakage is defined as the shifting of production in energy-intensive sectors with less carbon-neutralization policies to countries with carbon leakage risk. The Border Carbon Adjustment Mechanism operates by taxing products exported to the EU that carry a risk of carbon leakage.
Which sectors could be affected by The Border Carbon Adjustment Mechanism?
The sectors initially subject to CBAM during the transition period are Cement, Iron-steel, Aluminium, fertilizers, Electricity, and Hydrogen. Additionally, an increase in the number of emission/energy-intensive sectors subject to CBAM as determined by the EU is expected. By the end of 2025, it is likely that sectors such as plastics, glass, and paper will also become subject to CBAM.
Why is The Border Carbon Adjustment Mechanism important?
CBAM aims to facilitate the global transition to a sustainable industry. Steps to prevent carbon leakage in energy-intensive sectors and the universal adoption of decarbonization are likely to increase. For companies exporting to the EU, subject to CBAM or potentially subject to it, calculating and reporting carbon emissions per product in accordance with standards has become a mandatory requirement. Considering the economic obligations of CBAM certificates, strategies for direct and indirect emission reductions per product must be developed to create a decarbonization roadmap. Finally, receiving support from institutions serving in compliance areas of CBAM regulations is essential for achieving a sustainable economy and continuity, speeding up the adaptation process, and providing positive benefits to companies.
