MHA | Is the CBAM the start of Sustainability being a global trading…

Is the CBAM the start of Sustainability being a global trading norm?

Posted on: October 17th 2023 · read

Sunflowers and Windmill

The CBAM, the Carbon Border Adjustment Method, is a mechanism currently being developed by the EU to address the risk of so-called ‘Carbon Leakage’, where companies in the EU move carbon-intensive production abroad to countries with less stringent climate policies than those of the Union, or where EU products are replaced with more carbon-intensive imports.

Put simply, the CBAM is about levelling the playing field - putting a ‘fair price’ on the carbon emitted during the production of carbon intensive goods entering the EU, and to encourage cleaner industrial production in non-EU countries; which, of course, now includes the United Kingdom (excluding Southern Ireland).

At present the focus is entirely on carbon intensive industries but the mechanism is still in its infancy. Nevertheless, the CBAM will have a profound impact on non-EU producers and exporters to the EU in areas such as iron, steel, aluminium, cement, fertilisers, electricity and hydrogen production. In other words, the sectors most vulnerable to carbon leakage.

In order for businesses to prepare for the January 2026 roll-out of the CBAM, before that date importers will only be required to report the GHG emissions embedded in their imports without any financial adjustments. However, once the methodology has been ‘fine-tuned’, the reporting requirements will almost certainly be increased.

The adoption of ‘Implementing the Regulation’ brings the EU a significant step closer to roll-out. This trial phase will not result in directly taxing importers based on the EU’s carbon price, those failing to meet reporting requirements will face fines; and they are not insignificant.

The first critical deadline is that the first CBAM Report is due by January 31st 2024, covering goods imported in the last quarter of 2023.

To streamline reporting, an electronic database will be established to gather information reported during the transitional period. Initially, a CBAM Transitional Registry will be created to establish the foundation for the future CBAM Registry.

Any reporting declarant that fails to either submit a CBAM Report or to amend a CBAM Report when instructed, will face the European Commission levy of between EUR 10 and EUR 50 for every metric tonne of unreported embedded GHG emissions.

‘Implementing the Regulation’ also includes nine annexes and a series of significant business implications for non-EU producers and importers, including:

  1. Penalties the EU has set penalties for the trial phase between EUR 10 and EUR 50 per tonne of unreported embedded GHG emissions. However, under criticism, this may change.
  2. Impacts on Global Trade Nations such as India and Brazil have argued that the CBAM breaches World Trade Organisation rules and counties including the United States of America and South Africa fear their markets may be inundated with inexpensive imports from companies avoiding the EU tax.
  3. Reporting Requirements the January 31st deadline for CBAM reporting for industries such as steel, cement. Electricity, hydrogen, fertilisers and aluminium is already almost upon us, and the reporting period is the last quarter of 2023.
  4. Revenue Projections according to S&P Global analysts estimates, the CBAM could generate revenues of circa $80 billion annually for the EU by 2040.
  5. Industry Stakeholder Response the metals industry body, Eurometaux, has warned that the regulation has potential loopholes for importers. In addition, many industry executives appear to believe that EU member states have too much latitude in determining how to apply the CBAM measures, advocating for CBAM penalties to mirror those of the EU’s Emissions Trading System (ETS), currently set at €100 per tonne for unreported emissions.

We suspect that discussions will only grow more heated as the 31st January 2024 looms ever closer, not least because understanding the CBAM and its implications are critical for non-EU companies striving for market compatibility in Europe.

More than simply regulatory compliance, the CBAM represents a significant shift towards global sustainability and a new set of market dynamics. The European Commission contends that the CBAM will prompt other countries to implement their own emissions trading systems. The claim is substantiated by recent announcements from Turkey and Indonesia concerning the introduction of a ‘carbon price’.

Every non-EU producer and importer would be wise to familiarise themselves with the full, and developing, implications of the CBAM, initially by reviewing the EU CBAM webpage.

In conclusion

The CBAM has the potential to shape international business and trade whilst signifying the EUs proactive and leadership approach to carbon emissions. The European Union is banking on the idea that the CBAM could become the Gold Standard in ESG, GHG and climate regulation, much in the way that GDPR previously impacted global data protection standards.

The EU anticipates that regulated entities, especially corporations, in light of the CBAM dynamics, will align with EU laws even outside of its borders, creating a ‘ripple effect’ that will prioritise sustainability across the global marketplace.

With this in mind, it is crucial for non-EU producers and importers to remain alert, informed and alive to CBAM developments, ensuring they are fully prepared for its potential implications. As the landscape evolves, such organisations must adapt and prepare for a future where sustainability isn’t just a choice, but a norm in international trade.

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