Four things to know when preparing for EU Carbon Border Adjustment Mechanism reporting
7 min read
The application of the EU's Carbon Border Adjustment Mechanism ("CBAM") is fast approaching for importers and manufacturers of products in the cement, fertiliser, iron, steel, aluminium, hydrogen and electricity producing industries. How should companies prepare for CBAM application?
On 16 May 2023, the CBAM Regulation1 was published in the EU's Official Journal and has now entered into force.2
On 13 June 2023, the European Commission ("Commission") published both the draft implementing regulation and the related draft annexes covering the reporting obligations during the CBAM transitional period. These drafts expand on the reporting obligations under the CBAM Regulation, which will apply from 1 October 2023 until 31 December 2025.3 Both drafts will need to be adopted to enter into force, but they give insight into the reporting requirements to prepare for the October start date.
Here are four things to consider when preparing for the CBAM and its transition period , based on the draft implementing regulation (which is subject to change):
1. What to report
Based on the draft implementing regulation, each declarant would need to provide:4
- The total quantity of each type of product, identified by CN/tariff code, expressed in tonnes5
- Country of origin
- The installation where the product was produced (and specifically for steel goods, where known, the identification number for the steel mill where the batch of raw materials originated)
- The production route used for the manufacturing of the product, which reflects the technological option and information on specific parameters qualifying the route chosen and descriptive parameters that affect the embedded emissions of the goods
- Actual total embedded emissions in tonnes of CO2 emitted for each tonne of the goods, which would be calculated according to the method listed in Annex IV of the CBAM Regulation, as further expanded upon in the draft implementing regulation:6
- The direct embedded emissions following the methods detailed in Annex III of the draft implementing
- For indirect emissions, the declarant must submit, amongst other details, the electricity consumption and the corresponding emissions factor7 and
- Carbon price paid abroad8
The reports must be submitted to the new "CBAM Transitional Registry" at the end of the month following the close of each quarter.9 The first quarterly report is therefore due in January 2024.
2. Calculation methodologies for direct and indirect emissions
Direct emissions
Based on the draft implementing regulation, two methods may be used to calculate embedded emissions. The calculation-based method that determines emissions from source streams based on activity data obtained via measurement systems or the measurement-based method which determines emission sources through continuous measurement of the concentration of the relevant greenhouse gas.10 The draft implementing regulation further specifies how to monitor at the installation level.11
Until 31 December 2024, the draft implementing regulation allows calculation of the level of embedded emissions using other methods.12 This temporary derogation is to recognize the short timeframe for third-country operators to come into compliance, to ensure accurate data collection from the beginning of the transition period, and to allow the Commission to identify synergies with existing third country systems.13 The derogation is allowed only if the other method chosen leads to similar coverage and accuracy of emission data:
- Methods used under an eligible monitoring, reporting and verification system ("MRV") which will follow the rules of the jurisdiction where the installation is located for a carbon pricing scheme, a greenhouse gas emission reduction project, or another compulsory emission monitoring scheme.14
- Other methods following schemes that include carbon pricing where the installation is located, compulsory emission monitoring or an emission monitoring scheme at the installation which can include verification by an accredited verifier.15
Until 31 July 2024, another method may be used for determining the direct emissions of each import of goods if the reporting declarant does not have all the necessary information; if so, the reporting needs to state the methodology followed.16
Indirect emissions
The draft implementing regulation describes the rules for calculating indirect emissions.17 During the transition period, the goal is to collect data that will inform the methodology for the calculation of embedded indirect emissions following the end of the transition.
3. Reporting on a carbon price paid abroad
The CBAM Regulation recognises that other jurisdictions have their own systems for pricing carbon.18 Under the draft implementing regulation, reporting of key factors in these foreign systems is required, including the amount paid in the country of origin, converted into Euros, and embedded emissions covered by the carbon price. Other key features must also be reported, such as the form of the carbon price, the CN/tariff code of the product, information on rebates and free allocations, and a citation to the provision in the relevant legal act for the price, rebate and any other compensation.19
4. Penalties for non-compliance in reporting
Penalties for non-compliance are possible during the transition reporting period. If a report is not submitted by a reporting declarant, or if the reporting declarant has not taken the necessary steps to correct the CBAM report to meet all the relevant requirements in the draft implementing regulation, then the competent authority will apply a financial penalty.20
The penalty will be between €10 and €50 per tonne of unreported embedded emissions. This range will increase with inflation through the European index of consumer prices.21 Competent authorities have been given seven factors to consider in determining the ultimate penalty amount – this includes past behaviour, the amount of unreported information and any steps taken voluntarily to prevent similar infringements.22 Reports that remain non-compliant for more than six months will face a larger penalty.23
The reporting declarant may modify the CBAM report until two months after the relevant reporting quarter.24 For the first two reporting periods, it may modify the CBAM report until the submission deadline for the third CBAM report.25
Next Steps
The Commission is open to feedback on the draft implementing regulation until 11 July 2023. Feedback can be provided to the Commission here.
Ruth Benbow (Knowledge Manager, London) and Mia Monas (Trainee, Brussels) contributed to the preparation of this publication.
1 Regulation (EU) 2023/956 of the European Parliament and of the Council establishing a carbon border adjustment mechanism of 10 May 2023, 16.5.2023 L 130/52 ("the CBAM Regulation").
2 More information about the CBAM Regulation is available in our previous alert on the political agreement reached.
3 Article 32 of the CBAM Regulation.
4 Article 3(2) of the draft implementing regulation.
5 Article 3(1) of the draft implementing regulation. Different rules apply to imported electricity. See Article 35(2)(a) of the CBAM Regulation.
6 Article 35(2)(b) of the CBAM Regulation.
7 Article 3(3) of the draft implementing regulation and D.4 of Annex III of the draft implementing regulation.
8 Please see below, in Section 3, reporting on a carbon price paid abroad.
9 Article 8 of the draft implementing regulation.
10 Article 4(1) and Section B.2 of Annex III of the draft implementing regulation.
11 Section B of Annex III of the draft implementing regulation.
12 Article 4(2) of the draft implementing regulation.
13 Recital 9 of the draft implementing regulation.
14 Section A.1(48) of Annex III of the draft implementing regulation.
15 Section B.2 of Annex III of the draft implementing regulation.
16 Article 4(3) of the draft implementing regulation: If the reporting declarant chooses this method, it's required to indicate and reference the methodology followed to establish such values in its CBAM report.
17Section D.4 of Annex III of the draft implementing regulation.
18 Article 3(29) of the CBAM Regulation defines carbon price as: "the monetary amount paid in a third country, under a carbon emissions reduction scheme, in the form of a tax, levy or fee or in the form of emission allowances under a greenhouse gas emissions trading system, calculated on greenhouse gases covered by such a measure, and released during the production of goods".
19 Article 7 of the draft implementing regulation.
20 Article 16 of the draft implementing regulation.
21 Article 16(2) of the draft implementing regulation.
22 Article 16(3) of the draft implementing regulation.
23 Article 16(4) of the draft implementing regulation.
24 Article 9(1) of the draft implementing regulation.
25 Article 9(2) of the draft implementing regulation.
Ruth Benbow (Knowledge Manager, London) and Mia Monas (Trainee, Brussels) contributed to the preparation of this publication.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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