The EU’s Carbon Border Adjustment Mechanism – Key Points to Note
Effective October 1, 2023, the European Union’s Carbon Border Adjustment Mechanism (CBAM) has officially entered into force. CBAM is a landmark policy tool designed to set a fair price on the carbon emitted during the production of goods imported into the EU [1].
Currently, the carbon adjustment mechanism is primarily governed by two legal documents: (i)
Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023, establishing a carbon border adjustment mechanism. (ii) Implementing Regulation (EU) 2023/1773 of the Commission of 17 August 2023, laying down the rules for the application of Regulation (EU) 2023/956 regarding reporting obligations for the purposes of the carbon border adjustment mechanism during the transitional period.
CBAM and Its Basic Contents
(i) A carbon tax on goods listed in Annex I of Regulation (EU) 2023/956. Accordingly, six categories of goods will be subject to a carbon tax upon import into the EU market: cement, electricity, fertilizers, iron and steel, aluminum, and hydrogen. This list may be expanded in the future to include other energy-intensive goods that pose a high risk of greenhouse gas emissions. This will depend on the European Commission’s evaluation and review.
(ii) Starting in 2026, importers of CBAM-covered goods into the EU must purchase CBAM certificates. The European Commission will establish a specialized authority to manage CBAM registration for importing companies. Each registered importer will be granted a CBAM account containing information such as their name, address, contact details, EORI number, and CBAM account number [2].
(iii) By May 31st of each year, importers must surrender a quantity of CBAM certificates corresponding to their total embedded greenhouse gas emissions for the goods imported in the preceding year. If the European Commission finds a shortfall in the surrendered certificates, it will notify the competent authority of the importer’s member state, which will then inform the importer of the deficit [3]. Importantly, if EU importers can prove they have already paid a carbon price during the production of goods in a third country, they can claim a deduction in the number of CBAM certificates they must surrender [4].
(iv) The price of a CBAM certificate is based on the weekly average auction price of EU Emissions Trading System (EU-ETS) allowances [5]. This price is published on the European Commission’s website [6].
CBAM applies to EU-based importers and aims to reduce greenhouse gas emissions and protect the environment by leveling the carbon cost between domestic products and imports. Furthermore, it encourages technological innovation by promoting investment in green production technologies, leading to an increase in environmentally friendly “green goods.”
CBAM Implementation Roadmap
CBAM’s rollout involves four key milestones:
- From October 2023 – The “Transitional” Phase CBAM is officially in effect, starting with a transitional period to allow businesses to adapt. Until the end of 2025, importers of CBAM-regulated goods must comply with reporting obligations without the need to purchase certificates [7]. Importers must report data on the quantity of goods, total actual embedded emissions, total indirect emissions, and any carbon price paid in the country of origin, as per Article 35 of Regulation (EU) 2023/956.
- After the Transitional Phase (2026 Onwards) CBAM will be gradually phased in for the targeted goods. The key differences from the transitional period are:
- Verification: Importer reports must be verified by an accredited verifier.
- Financial Obligation: Importers will begin to incur financial obligations through the purchase of CBAM certificates. These fees will gradually replace the free allowances provided under the EU-ETS, starting at 2.5% in 2026 and reaching 100% by 2034.
- From 2027 The European Commission will conduct a comprehensive review of CBAM’s implementation. This review will assess its impact on businesses, trade, and its effectiveness in reducing greenhouse gas emissions. The findings will inform potential adjustments to the mechanism.
- From 2034 CBAM will be fully implemented. From this point, the CBAM levy will completely replace the free allowances allocated under the EU-ETS.
What Do Vietnamese Enterprises Need to Do?
To comply with the EU’s CBAM policy and ensure smooth, safe market access while avoiding economic and legal risks, Vietnamese businesses exporting CBAM-covered goods to the EU should take note of the following:
First, review your products. Businesses must determine if the goods they export to the EU are subject to CBAM. If they are, exporters play a crucial role in providing the necessary emissions data to their EU partners for their reporting obligations, starting immediately.
Second, coordinate with your import partners. Once a product is identified as being covered by CBAM, the exporting enterprise must work closely with its EU-based importer to report the level of greenhouse gas emissions associated with its production.
Third, invest in green technology. Utilize clean energy sources and invest in green production technologies. This structural shift towards “greening” products will reduce the number of CBAM certificates an importer needs to purchase, making Vietnamese goods more competitive and attractive.
Fourth, stay informed. Continuously seek out and update information on the CBAM mechanism and related legal regulations. This is the best way to protect your interests and mitigate potential risks.
[1] European Commission, “Carbon Border Adjustment Mechanism”, https://taxation-customs.ec.europa.eu/carbon-border….
[2] Regulation (EU) 2023/956, Article 14.
[3] Regulation (EU) 2023/956, Article 22.
[4] Senyarich. M, Casenave. S, “The Carbon Border Adjustment Mechanism – How to prepare your business for CBAM”, p.3.
[5] European Union Emissions Trading System – Hệ thống mua bán quyền phát thải của EU.
[6] Regulation (EU) 2023/956, Article 21(1), (2).
[7] Regulation (EU) 2023/956, Article 32.
Image source: https://hakangurdal.com/biography/carbon-border-adjustment-mechanism/