Emission control: how to be ready for the CBAM’s launch

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Emission control: how to be ready for the CBAM’s launch

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John Cunningham of Deloitte Ireland explains the motivation behind the EU’s CBAM, the timeline for its intended implementation, and what companies should be doing to prepare.

Background

The CBAM is a policy in support of the EU Green Deal: the ambition of the EU to be climate neutral by 2050.

A milestone target for the EU, to achieve its climate ambition of carbon neutrality, is to reduce CO2 emissions by 55% by 2030, benchmarked on carbon emissions in 1990.

There are existing taxes on carbon-generating production in the EU, so the purpose of the CBAM is to cut carbon leakage into the EU by introducing a new carbon import levy on a category of products:

  • Iron;

  • Polymers;

  • Textiles;

  • Steel;

  • Chemicals (including hydrogen);

  • Cement;

  • Aluminium; and

  • Fertilisers.

The primary objective is to stop EU importers of CBAM products from outsourcing production to countries that do not levy carbon emissions. The policy will link the carbon levy to the carbon price payable under the EU Emissions Trading System when the same goods are produced.

The scope of the CBAM varies by product from basic forms and shapes to more complex forms in polymers. For example, where steel is manufactured into tubes, not only does the carbon released related to this production have to be captured and recorded, so do the carbon emissions from the steel production itself. This is also an example of direct and indirect carbon emissions in production processes.

Responsible party

In the proposed text of the CBAM, the party responsible for importing into the EU is the declarant for import customs clearance. The declarant can be a customs broker. However, most customs brokers deliver their services in a direct representative capacity (agent only) so the importer will be responsible, and, consequently, liable for the levy.

The declarant can be another company, but this company appointed must be established in the EU and will be responsible for carbon emission reporting on their third-country in-scope imports, and for payment of the levy when the policy becomes EU law.

The declarant for the import will need a CBAM licence to import goods and will pay the levy by purchasing carbon certificates.

Transitional period

The transitional period for the CBAM is expected to start in January 2023, during which time, EU importers must submit quarterly CBAM reports, stating their imports of CBAM products, and the emissions ‘embedded’ in their imported products.

While some of the finer details are still to be agreed on, there is little doubt that the CBAM will eventually be introduced in the EU. Based on the present positions of the legislators, the transitional period of the CBAM is scheduled to enter into force on January 1 2023. Importers will be required to start reporting emissions embedded in the CBAM products they import.

The transitional period is proposed to end in January 2027, after which the carbon levy under the CBAM must be paid. To pay the carbon levy under the CBAM, EU importers must purchase CBAM certificates covering the emissions embedded in the products they import and submit annual CBAM declarations.

Importing CBAM products, purchasing CBAM certificates, and submitting CBAM declarations will require a special authorisation (the ‘authorised (CBAM) declarant’) issued to EU importers or representatives acting on behalf of one or more importers by the competent CBAM authority.

Preparing for the CBAM: what steps to take?

Reviewing your range of products and determining what products you import from outside EU and European Economic Area countries that are in scope is important.

Below are some actions businesses can take to prepare for the transitional period of the CBAM:

  • Carry out an initial impact assessment – which of your products will be covered by the CBAM? Where do you source them from (i.e., origin country)? What is the volume of your imports of these products?

  • Set up the process to collect data on the embedded emissions – who in the supply chain holds this information? Who will reach out to the suppliers?

  • Set up the reporting process in the EU – determine the business function within your organisation responsible for the compliance requirements of the CBAM.

  • If the default option is chosen, rather than engaging with your suppliers in each country where the in-scope product is produced and develop protocols and processes for capturing the supply chain carbon emissions, the reporting will default to the worst 10% of the carbon emitting production facilities, for that product, in the country it is being produced.

Should the transitional period commence on January 1 2023, the first quarterly CBAM report will be required in April 2023.

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