Carbon Border Adjustment Mechanism (CBAM): What You Need to Know
By: Wendy Schlett
This past year, the European Union (EU) raised the bar for sustainability with two pieces of legislation: the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM). CSRD aims to increase the disclosure of key sustainability metrics, while CBAM is a pricing system to impose a fee on imported carbon-intensive goods. Each piece of legislation stands to impact US companies doing business in the EU or with EU based companies. Here is what you need to know about CBAM and how Foresight can help.
What is CBAM?
CBAM is a system for taxing imported goods to prevent companies from relocating their more carbon-intense activities to countries with less stringent climate policies. It equalizes the embodied cost of carbon between locally produced and imported goods. In short, while it may be cheaper to produce high-carbon goods outside the EU because you can dodge climate regulations, it’s going to cost you the difference in import taxes to bring it into the EU.
To comply with CBAM, EU importers and non-EU operators must be able to quantify the embodied carbon of their materials so they can pay the appropriate tax.
Who does CBAM affect?
EU importers, non-EU operators, and EU consumers will all be impacted by CBAM. Importers will need more robust data collection strategies, mechanisms for carbon accounting, and visibility into their supply chain. Non-EU operators will be expected to provide insights into product chemistry and the embodied carbon of products they sell into the EU.
While this may seem overwhelming for non-EU operators, there is immense opportunity for marketplace differentiation if you’re able to quickly provide verified data around embodied carbon and strategies for reducing embodied carbon – an immediate win for your customers facing a carbon tax.
What can in-scope companies expect?
EU Importers will be required to report upstream emissions for relevant imported goods, quantify the carbon price had the goods been manufactured under the EU’s ETS (Emissions Trading Scheme), and purchase carbon certificates to offset the difference.
Non-EU Operators will be required to calculate and report the embedded carbon of relevant goods they export to the EU. If carbon offsets have already been accounted for during production, this cost can be deducted from the CBAM requirements for the EU importer.
EU Consumers are not directly subject to CBAM reporting requirements but may see an increase in the cost of components.
When will CBAM go into effect?
CBAM will be implemented in a phased approach to allow companies time to build critical reporting mechanisms.
2023-2025: Imports of iron, steel, aluminum, electricity, fertilizers, cement, hydrogen, certain precursors (i.e. cathode active materials), and a limited number of screws and bolts will be subject to reporting only.
2026-2030: CBAM will begin to phase in payments and expand to include all plastics and chemicals.
2030-onward: CBAM will continue to expand at the same pace the ETS free-allowances are phased out until all products are covered.
*Exceptions: Electricity markets already coupled with EU internal markets and goods imported from companies with comparable carbon pricing systems.
What does this mean for US suppliers?
Responding to CBAM regulation requires understanding the embodied carbon in your supply chains for all your products. Procurement, facilities, and product engineers have to work together to gather the necessary information. Everything from EU import codes, energy associated with manufacturing processes, and the material weights in all your products must be included.
How can Foresight help with CBAM?
Foresight can help with each step of your CBAM reporting journey, including determining what is in scope for your company, strategizing the approach to your product line, completing limited or full LCAs, and submitting your annual compliance reporting. Our team of sustainability experts understand both organizational compliance and product chemistry, providing the most holistic approach to your sustainability journey.
