Understanding the Carbon Border Adjustment Mechanism (CBAM) and its impact on your business and your customers' businesses.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is the European Union’s (EU) new carbon tax. It aligns with the EU’s domestic Emission Trading System (ETS) to ensure fair competition and encourage cleaner production practices globally.
Key Points:
- Effective Date: The CBAM has been in action since 1 October 2023.
- Purpose: It aims to prevent carbon leakage by imposing a carbon price on imported goods equivalent to the carbon price on domestically produced goods. This encourages non-EU countries to adopt cleaner industrial practices.
- International Compliance: The CBAM is designed to comply with the EU’s international commitments and obligations.
How Does CBAM Work?
- Calculation of Emissions: During the transitional phase, three methods are prescribed for calculating embedded emissions. From 1 January 2025, only the EU method will be accepted.
- CBAM Certificates: EU importers must purchase CBAM certificates to cover the carbon price that would have been paid if the goods were produced within the EU.
- Carbon Price Deduction: If the non-EU producer has already paid a carbon price for the imported goods, that cost can be deducted from the CBAM obligation, provided the carbon price of the third country is recognized by the EU.
Overall Impact:
- Data Collection: Companies importing goods into the EU will need to work with their suppliers to gather necessary data, such as the upstream emissions or carbon footprints of each product or material.
- Financial Risk Assessment: Companies will need to quantify the financial risk of CBAM and the impact of importation, weighing the pros and cons of production locations.
- Supplier Selection: Importers must consider the advantages and disadvantages of choosing low-emitting suppliers outside of the EU or potentially relocating manufacturing to within the EU.
- Supplier Responsibility: Suppliers providing raw materials or goods to the EU will need to provide emissions data or carbon footprints on their products.
By understanding CBAM, you can better assess its impact on your business and your customers' businesses.