CBAM vs ETS – important information

The CBAM (Carbon Border Adjustment Mechanism), referred to as a border carbon tax in our country, defines a mechanism for adjusting prices at the border taking into account CO2 emissions. CBAM regulates and at the same time equalises the costs of CO2 emissions for goods imported into the EU and EU goods covered by the Emissions Trading Scheme (EU ETS). It establishes CO2 emission charges for carbon-intensive products entering the EU market. This instrument was primarily created to prevent the leakage of greenhouse gas emissions to countries with lower environmental policy standards and to create a level playing field for companies within the European Union. Reducing the relocation of EU production to places in the world where decarbonisation requirements are less stringent became a priority, as such a process undermined the Union's efforts to reduce GHG emissions.

CBAM was designed to coincide with the EU Emissions Trading Scheme (EU ETS). Under the EU ETS, businesses already incur significant costs to purchase GHG allowances. In the target period, from 2026 onwards, CBAM will be based on a system of certificates covering emissions embedded in products imported into the EU. Their price will reflect the price of ETS allowances. Given that decisions on the choice of sub-suppliers or the aggregation of production are multi-year processes, it is worthwhile to lean into this issue today and include it in companies' strategic plans.

The implementation of CBAM itself is divided into two phases. In the first, a transitional period from 1 October 2023, declarants of imported goods were required to submit quarterly reports. These are to include information on the goods covered by CBAM and are to be submitted no later than one month after the end of the quarter in question. During the first phase, the number of free ETS allowances is 100 per cent. The second phase of implementation will start on 1 January 2026. Importers will then be obliged to submit annual CBAM declarations (by 31 May), which will contain, among other things, information on the total number of CBAM certificates to be surrendered. We already know today that the amount of free ETS certificates will be gradually reduced.

Implementing Regulation 2023/1773 gives some flexibility in terms of the values used to calculate embedded emissions. In the first year of implementation of the instrument, importers have a choice of three reporting methods:

• full reporting under the new methodology (EU method);
• reporting based on equivalent third country national systems;
• reporting based on default values, which the European Commission will publish and which will be available, among others, in the CBAM transition register.

From 1 January 2025, only the EU method will be accepted.

Furthermore, it should be borne in mind that the current list of goods covered by CBAM (e.g. cement, cast iron, steel, aluminium, fertilisers or individual gases) will be significantly expanded.

Author: Mirosław Koczar

Graphics: expolink.org