What is CBAM?
Introduced as a price adjustment measure to combat climate change by the European Union (EU) as part of their “Fit for 55 Package” (aiming for a 55% reduction in greenhouse gas emissions by 2030), the Carbon Border Adjustment Mechanism (CBAM) aims to address reduction of emissions in carbon-heavy sectors. This measure has been put in place to deter carbon-leakage, which occurs when industries shift production to countries with less stringent climate laws or when a country replaces domestic products with carbon-intensive imports.
The CBAM has been designed to set a ‘fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU and to encourage cleaner industrial production in non-EU countries’.
Who Does CBAM Apply To?
The EU has released a list of goods in the pertinent sectors of cement, iron and steel, aluminum, fertilizers, hydrogen and electricity, for which such carbon pricing will be applicable. The actual declared carbon content embedded in the goods imported in the EU will be taxed according to a formula that will reflect the effects of the EU Emissions Trading Scheme (ETS) on the production of similar goods in the EU. To facilitate a smooth transition, CBAM has been initiated as a phase-wise protocol from 1 October 2023, becoming fully operational in 2026.
What is the Emission Coverage?
For companies in the aforementioned sectors, reporting of embedded emissions and registration with the EU has begun on a quarterly basis. These emissions currently cover Scope 1 along with embedded emissions in input materials (Scope 3). Scope 2 emissions and other Scope 3 emissions are not required to be accounted for at the moment.
There is no financial adjustment at this stage. From 2026, the registered EU importer may purchase certificates corresponding to the weekly ETS allowance. Based on the emissions declared, the certificates purchased are to be surrendered (which cannot be traded). If the importer can prove that a carbon price has already been paid during the production of the imported goods , the corresponding amount can be deducted. It is essential to note that by 2034, all products covered under the EU ETS will be under the purview of CBAM.
What are the Risks and Opportunities Surrounding CBAM?
Several countries (including India) have opposed the CBAM as a trade-barrier and inhibitive to free trade. Further, for small and medium-scale industries where clean production technologies have not been explored, the economic drawbacks of such carbon pricing may be heavy. Due to lack of skilled professionals and awareness, many companies may be unable to adhere to accurate reporting standards, partly due to the uncertainty surrounding this framework. From an Indian standpoint, taking into account significant export activity, a 20-35% tax impact has been predicted.
In terms of opportunities, companies contribute to emission reduction on a global scale. By greening their processes across the supply chain, companies can ensure long-term operational sustainability by investing in low-carbon or emission reduction measures. As consumer awareness grows, adhering to CBAM requirements can be leveraged by companies to advertise their products, leading to a potential increase in demand for their products and attracting environmentally conscious investors.
Get CBAM Ready With CERE’s Tailored Solutions
Drawing on multiple years of experience in the sustainability sector, CERE can assist your company by undertaking a carbon footprinting assessment of your operations and disclosing Scope 1, 2 and 3 emissions (including embedded emissions) in accordance with the GHG Protocol, as well as supporting verification of the same against international standards such as the ISO 14064 or ISAE 3410. We will facilitate CBAM reporting by consolidating operational data and emission values as per the EU’s requirements – simplifying the process for your business.
Furthermore, once we identify emission hotspots, we will provide customized solutions to reduce the product’s carbon footprint and thus reduce the risks associated with an increased tax liability. We will support the development of a holistic strategy to augment your company’s environmental journey.
Connect with us at info@cere-india.org to take the next step in your journey towards sustainability.