CBAM Reporting and EU ETS Interplay: What Businesses Need to Know?"

With the beginning of the transitional phase of the Carbon Border Adjustment Mechanism (CBAM) in October 2023, importers of certain carbon-intensive goods into the EU must now report on their products’ embodied carbon emissions. This regulation is a part of the ‘Fit for 55 Package’, designed to reduce the EU’s greenhouse gas emissions by 55% by 2030. Once the transitional phase ends in December 2025, the regulation will cover more goods under the EU Emission Trading System (ETS). The CBAM definitive period begins in 2026 and will gradually phase out EU ETS-free emission allowances. Importers will be required to pay a financial levy from 2026 onwards.

It is important to note that EU ETS and CBAM are closely related. EU ETS is a cap-and-trade system that sets a price on the carbon emissions that importers must pay for the carbon emissions embodied in their products. This is achieved by purchasing CBAM certificates. You can read an overview here to understand EU ETS better.

What are the Objectives of CBAM?

• Equalize the carbon price for domestic and imported EU products to prevent carbon leakage. Carbon leakage is when businesses move production from countries with stricter emission constraints to countries with laxer constraints, increasing greenhouse gas emissions.
• Encourage greener production of products in non-EU countries.
• Reinforce the Emission Trading System.

What is the Scope of CBAM?

Starting from October 2023 until the end of December 2025, there will be a transitional phase where CBAM (Carbon Border Adjustment Mechanism) will apply to certain goods and precursors that have a high carbon footprint and are at risk of carbon leakage. These goods include cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. After a brief review of this regulation in January 2025, more goods and indirect emissions will be included in the definitive phase to cover about 50% of the emissions in the ETS-covered sector.

What and where to report?

What are the Reporting Details of CBAM?

Transitional Phase – October 2023 to End of December 2025

During the transitional phase, importers of the goods in scope must report on embodied greenhouse gas emissions in their import. Here are some more details:

The transitional phase requires quarterly emissions reportingby the importers/operators who run installations producing CBAM goods.

1. EU-authorized importers must submit their 1st CBAM report by 31st January 2024 for the data collected in the 4th quarter of 2023.
2. Reporting: Direct and Indirect embedded GHG emissions for all CBAM goods included in Annex I of the Regulation
3. Flexibility, such as using default values, has been provided to help operators and importers of complex goods report embedded emissions. The European Union and the Joint Research Centre (JRC) have established default emission factor values (officially published on 22nd December 2023). Operators and importers can use these values to calculate the embedded emissions of precursor goods utilized as inputs and consumed in the production process for other CBAM goods. These default values are beneficial in cases where the actual emission intensities for these precursor goods are unavailable.
4. No financial adjustments are required during the transitional phase.
5. Purchase of CBAM Certificates is optional.
6. GHG emissions embedded in the CBAM good must be verified.
7. CBAM emissions scope during the transitional phase will include:

• Scope 1: Direct - Emissions generated from the production of CBAM goods at the installation level. This includes the production of heating and cooling for this product, irrespective of the installation where heat and steam are produced.
• Scope 2: Indirect - Electricity consumed to produce CBAM goods.
• Scope 3: Indirect - Input material under CBAM scope (like complex goods)

8. Calculation methodologies are defined in Annex III of the legislative document.

Definitive Phase – Beginning January 2026

As the CBAM definitive phase begins, the free allowances of emissions allocated by EU ETS will gradually phase out. CBAM will continue to make decarbonization efforts more effective.

1. The emissions reporting will now be annual instead of quarterly. For example, reporting for data collected in 2025 will be submitted before 31st May 2026
2. Different monitoring requirements will apply and require verification by an independent accredited verifier.
3. EU importers must buy and surrender the number of “CBAM certificates” corresponding to the GHGs embedded in imported CBAM goods, which can be purchased from the EU's National Competent Authorities (NCA). The price of the certificates will be determined based on the average weekly auction price of EU ETS allowances, expressed in € per tonne of CO2 emitted.
4. Details of the carbon price require proof paid by the importer of CBAM goods into the EU. This price will be adjusted against the purchase of CBAM certificates to avoid double payment of emissions.

Where Should CBAM Details be Reported?

The European Commission has created a CBAM transitional registry to assist importers in fulfilling their CBAM obligations. To access this registry, importers must request permission through the National Competent Authority (NCA) of the Member State where they are based. The reporting structure is also available in XSD and XLS format, which may be updated and uploaded back into the registry. There is also a communications template that helps installers/operators provide the required information for reporting on embodied GHG emissions to their importers.

Consequences of Non-compliance with CBAM

Individuals who are not authorized CBAM declarants and do not adhere to the regulations will face harsher penalties. These penalties will amount to three to five times the excess emissions penalty outlined in the EU ETS Directive 2003/87/EC. The Member States will be responsible for imposing these penalties.

• Penalties between EUR 10 and EUR 50 per unreported tonne of embedded emissions apply during the transition period.
• The penalty for authorized CBAM declarants for excess emissions is EUR 100 per tonne of CO2e emitted by the facility for which the operator has not surrendered emission allowances.

In our upcoming blog on CBAM regulation, we will investigate how businesses can be prepared for reporting due January 31st, 2024. In case you wish to have a full presentation of CBAM, you can write to us and request a CBAM presentation, and we will be glad to share the same.

Related Resources

• CBAM practical guide to business.