As of October 1, 2023, the transitional phase of the EU’s Carbon Border Adjustment Mechanism (CBAM) has started. It complements the European Emissions Trading System (EU ETS) and imposes reporting obligations on importers of emission-intensive goods into the EU.

As data will have to be collected, suppliers of affected goods should accustom themselves early with CBAM requirements. That rings especially true as there’s already a set timetable for when CBAM will apply to more goods and require purchasing emission certificates.

What is the objective and status of CBAM?

The aim of CBAM is to align the carbon prices of goods imported into the EU with goods produced in the EU. Since under the EU ETS, only EU producers have to purchase certificates, thus raising their prices in comparison to imports, the CBAM aims to level the playing field. CBAM is the first regime of its kind in any emission trading system, though the EU Commission maintains that it is a WTO-compatible measure that boosts global sustainability.

CBAM entered into force on May 17, 2023 and, as a Regulation, is directly applicable in all EU Member States.

With the start of CBAM’s “transitional phase” on October 1, 2023, affected companies now have the duty to collect the information necessary for upcoming periodic reports due on imports and emissions. Certificate trading will only gradually start when CBAM enters its “final stage” in 2026.

Which goods fall within the scope?

During the transition phase spanning from October 1, 2023 to December 31, 2025, CBAM applies “only” to imports of certain CBAM goods. While the scope is expected to expand in the future, for the time being, the combined nomenclature codes, as listed in Annex I of Regulation (EU) 2023/956 (p. 90 onwards), set out the types of goods which will be affected:

• Certain iron and steel goods and certain goods (e.g., bolts)
• Aluminum and goods made of aluminum
• Iron ore and hydrogen
• Some fertilizers
• Electricity
• Mineral products (cement)

CBAM applies to goods or certain processed products made from these goods. Furthermore, there is no de minimis rule for small companies or companies which import low numbers.

Exemptions currently exist for goods originating in Liechtenstein, Norway, Iceland, as those countries participate in the EU ETS, as well as for goods originating in Switzerland, as the Swiss emission trading system is linked to EU ETS. The exemption rule is expected to be extended to other countries depending on their CO₂.

Who is responsible?

CBAM applies directly to all persons or entities who import goods to the EU (importers). Importers will request the relevant information from the manufacturers of CBAM goods that are imported into the EU (so called Operators). So while Operators don’t have any immediate obligations under CBAM, they will be affected indirectly.

What are the specific obligations?

Importers: In the transition phase, information gathering obligations apply from October 1, 2023 with quarterly reporting requirements. The first report to be submitted to the European Commission is due on January 31, 2024. The report must include:

• Energy use: total quantity of each type of commodity in MWh for electricity and in tons for other commodities. The regulation requires that it is reported for each facility producing the goods in the country of origin.
• Embedded emissions: total actual embedded emissions expressed in tons of CO₂ emissions per MWh of electricity, or tons of CO₂ emissions per ton of each product type for other products (calculated using the methodology set out in Annex IV), and total indirect emissions or default values provided by the EU Commission until June 30, 2024.
• Country of origin of imported goods, identity and location of the facilities where the goods were produced
• Carbon price to be paid in the country of origin for emissions contained in imported goods, taking into account relevant rebates or other forms of compensation.

After the transition phase, importers will be required to purchase CBAM certificates. 

Reporting obligations are reduced from quarterly to annual reports due by May 31 of each year with the first report due on May 31, 2027 for the year 2026.

Operators (manufacturers): Importers will require operators to provide independently verified information on embedded emissions from CBAM-covered goods imported into the EU.

If the goods of one company are integrated into the goods of another, the company from whom the importer requests information is expected to obtain the necessary information from the other operators in the supply chain. This means that supply contracts will have to be updated to include contractual obligations to supply the necessary data. Companies affected by national supply chain laws that work in a similar fashion might build on existing clauses.

While in previous EU and national legislation, there were often exemptions for small enterprises (de minimis rules), this won’t be the case for CBAM. In some cases, importers and manufacturers will face such reporting obligations for the very first time, so they should prepare as soon as possible. 

Who needs to be an “Authorized CBAM Declarant”?

As of January 1, 2026, only authorized declarants can import CBAM goods into the EU. Companies importing CBAM-covered goods can apply for the status of authorized CBAM declarants from December 31, 2024.

To be approved by the competent authority, an applicant company must meet the following criteria:

• The applicant has not been involved in a serious infringement of customs legislation, taxation rules and/or market abuse rules.
• It demonstrates the financial and operational capacity to fulfill CBAM obligations.
• It is established in the Member State where the application is submitted.
• It has been assigned an (Economic Operators Registration and Identification) EORI number.

In order to prove “operational capability” to fulfill CBAM obligations, it will be important that companies have necessary operational and legal measures in place before then. For the transition phase up to December 31, 2025, an Indirect Customs Representative can be used as substitute for a CBAM Declarant.

Sanctions in case of non-compliance

Failure to comply with CBAM reporting requirements or inaccuracies in CBAM reports can result in penalties set by each EU member state, ranging from €10 to €50 per ton of unreported or incorrectly reported embedded emissions.

Authorized CBAM declarants, which fail to surrender the necessary number of CBAM certificates by May 31 of each year starting in 2027, will be held liable for the payment of fines equal to those under the EU ETS, meaning €100 for each ton of CO₂.

Outlook: purchasing obligations

Following the reporting obligations, ultimately, when certain goods are imported into the customs territory of the Union, they are subject to the same carbon price as they would have been if they had been produced in countries that are subject to the European Emissions Trading System (EU ETS. This obligation will start in 2027 for the year 2026. The CBAM certificates will be sold via a platform operated by the EU Commission. The obligation to purchase and surrender CBAM allowances will gradually increase corresponding with the reduction of free allocation of EU ETS to EU producers. Importers will initially have to pay for only 2.5% of embedded emissions for 2026, and this rate will gradually increase to 100% of grey emissions by 2034. Companies already affected by other reporting obligations (such as EU Taxonomy, CSRD, national supply chain acts) should carefully assess where data that’s already being collected can be reused for CBAM and where there are significant differences.