Preparing for the Carbon Border Adjustment Mechanism (CBAM)
VAT and indirect tax
Preparing for the Carbon Border Adjustment Mechanism (CBAM)
Sun 30 Apr 2023
Following the adoption of CBAM by the European Union (EU) parliament, businesses impacted will have a transition period beginning 1 October 2023. If your business imports goods and materials from outside the EU and is in scope of CBAM, you need to prepare as a matter of urgency. Businesses not yet covered by CBAM should monitor its progress as more products are expected to be covered in the near future.
With CBAM, the EU seeks to levy a tax on carbon emissions, known as embedded emissions, incurred during the production of goods imported into the EU.
CBAM will supplement the current EU Emission Trading System (ETS), lowering exposure to carbon leakage. The embedded emissions of imported goods need to be declared and offset with CBAM certificates. CBAM certificates will be sold and purchased only by an EU authority and the price will be linked to the price of the ETS certificates.
CBAM scope for businesses, products and countries
CBAM applies to all declarants, which refers to the name of the business filing the import declaration into the EU. During the transitional period, declarants need to request authorisation to be still able to import goods once CBAM becomes fully effective on 1 January 2026.
Currently, aluminium, iron, steel, fertilisers, electricity, hydrogen, certain precursors, and several products such as bolts and screws are in scope of CBAM. This scope will be further broadened in order to encompass all ETS products by 2030. including polymers, chemicals and mineral oil products.
The commodity code of goods determines which products fall under the scope. The CBAM proposal includes a list of commodity codes in scope.
In terms of countries, CBAM applies to all non-EU countries except those that already levy a carbon emission tax that is recognised by the EU. However, certain areas and countries are excluded from CBAM’s scope, including Switzerland and the European Economic Area EEA countries of Iceland, Lichtenstein and Norway.
Expected timelines and actions
Now – 1 October 2023. Companies should use this time to set up control mechanisms that will allow them to calculate and report embedded emissions on products that are to be imported into the EU.
1 October 2023 – 31 December 2025. Companies need to collect data on the embedded emissions of their imported CBAM goods and file quarterly CBAM reports, with the first quarterly report to be filed by 30 April 2024.
1 January 2025 – 31 December 2025. Importers of CBAM goods are expected to register as authorised CBAM declarants.
1 January 2026 – onward. CBAM goes fully live, including enforcement measures. An authorised declarant must submit a CBAM declaration by 31 May each year reporting the total quantity of imported goods during the preceding year, with the first report to be submitted by 31 May 2027. The report will need to cover the total embedded emissions in those goods and the corresponding total number of CBAM certificates to be surrendered after deducting any carbon price paid abroad. The authorised declarant must purchase and surrender CBAM certificates in an amount corresponding to the declared amount of emissions embedded in the products by 31 May, along with the annual report.
The explanatory memorandum setting out how the rules will work can be found here.
Enforcement and penalties
If a company cannot calculate the embedded emissions of a good, default values will apply. This corresponds to a penalty, as the default values are calculated based on the average emission of the exporting country’s 10% worst-performing plants for the specific good, including a markup. If this is not possible to determine, then the value is based on the average emission of the 5% worst-performing plants in the EU. Furthermore, penalties for non-compliance will apply from 1 January 2026.
What to do now?
As lots of importers are expected to be affected by CBAM, we strongly advise you to check the following:
- Check in whose name the goods are imported: will you be the declarant, or will that be your indirect customs representative?
- Check the commodity codes you use upon import into the EU and assess whether these are likely to fall within the current scope of CBAM.
- Check the supply chain of the products and assess whether the countries involved might fall under the scope of CBAM.
- Evaluate and analyse your entire supply chain to find products with lower embedded carbon emissions.
Depending on the answers to the above questions, it is vital to use this time to set up control mechanisms that will allow you to calculate and report embedded emissions on products to be imported into the EU.
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Marius Horndt VAT & Customs Tax Consultant - The Netherlands
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