As global trade evolves, the Carbon Border Adjustment Mechanism (CBAM) emerges as a critical regulatory development for businesses engaged in carbon-intensive industries. This mechanism applies globally to all companies, including those in the European Union (EU), and requires exporters to the EU to account for carbon emissions associated with their products. CBAM reporting is essential for businesses to comply with these requirements and remain competitive in the EU market.
Impact of Carbon Border Adjustment Mechanism on Carbon-Intensive Sectors
Under the CBAM, carbon-intensive industries are required to comply with reporting regulations and disclose the embedded emissions of their products. Key sectors include:
To navigate the CBAM successfully, companies need to focus on short-term compliance and long-term decarbonisation. In the short term, companies can invest in strong data collection and reporting systems to track carbon emissions and imports, while encouraging teamwork across departments for smoother compliance. In the long term, companies that cut emissions faster than their competitors can enjoy lower carbon credit costs, higher market demand, and potential price premiums for eco-friendly products. Investing in decarbonisation technologies can also help reduce carbon costs and lower overall expenses related to energy, water, and waste.
Carbon Border Adjustment Mechanism Timeline and Implementation
Transitional phase (2023-2025)
From October 1, 2023, to December 31, 2025, CBAM enters a transitional phase. During this period, companies need to:
- Report greenhouse gas emissions embedded in your imports quarterly.
- Detail direct and indirect emissions, as well as any carbon price paid in the country of origin.
Importantly, there are no financial obligations during this phase. This phase serves as a learning opportunity for all stakeholders and refine their methodology for the definitive period.
Full implementation (2026 onwards)
Starting January 1, 2026, CBAM will be fully implemented. Key features include:
- Obligation to purchase sufficient emission allowances for imported embedded emissions.
- Annual CBAM declaration comparing imported embedded emissions with acquired emission allowances.
- Potential financial sanctions if insufficient certificates are acquired.
This gradual introduction aligns with the phase-out of free allowances under the EU Emissions Trading System, supporting the decarbonisation of EU industry.
Key dates for businesses
Key Considerations for Carbon Border Adjustment Mechanism
The introduction of CBAM necessitates a strategic reevaluation for companies. Businesses must ensure transparency throughout their supply chains, gaining a comprehensive understanding of the product categories and materials that fall under CBAM regulations. This transparency is vital to mitigate financial risks associated with non-compliance.
Companies need to understand the specific emissions related to their products to comply with CBAM. While a product’s carbon footprint (PCF) looks at all greenhouse gas emissions throughout its entire life—from production to disposal—the CBAM focuses only on certain parts of this process. This means businesses must identify the emissions from the raw materials used and the actual manufacturing steps. Companies that have already conducted life cycle assessments (LCA) or created environmental product declarations (EPD) can use some of that information, but they will need to adjust their calculations to meet CBAM standards. Essentially, it’s about pinpointing the emissions that matter most for compliance and ensuring that all relevant data is accurately reported.
Explore Life Cycle Assessment Today
ESC believes that completing a Life Cycle Assessment (LCA) can help comply with CBAM regulations while also identifying areas to reduce emissions. LCA is crucial for understanding the environmental impacts of products throughout their entire life cycle. By identifying key areas where environmental impacts occur, companies can make informed decisions to reduce emissions, conserve resources, and enhance sustainability.
Need help with CBAM reporting requirements? ESC’s sustainability experts are here to assist you with life cycle assessments and carbon footprint evaluations.