Sustainability is intended to prevail in the production of all goods. As part of the global climate goals, the EU has set up a program to reduce imports of CO2-heavy products and prevent the migration of European manufacturers. The Carbon Border Adjustment Mechanism, or CBAM, is designed as a compensation system, managed at the EU level, and imposes new obligations on the import of specific goods.
Imported goods that are produced with high levels of CO2 emissions will only be allowed into the EU at an increased ‘entry fee’. The EU plan to limit the export of environmentally harmful goods to the EU, particularly from countries that do not strictly pursue or even follow the global climate goals. With the CBAM border adjustment mechanism, between 2023 and 2030, a financial burden like that of the EU emissions trading system will be imposed on third-country goods that are produced with high levels of emissions of greenhouse gases in cement, aluminum, iron, and steel, as well as fertilizers and electricity. In the future, importers will have to purchase certificates for greenhouse gas-intensive goods that correspond to the weekly EU carbon price.
The CBAM is part of the ‘Fit-for-55’ plan, which aims to reduce greenhouse gas emissions in the EU by 55% by 2030 compared to 1990 levels. It is embedded in the EU’s climate goal of achieving climate neutrality by 2050.
The aim of this measure is, on the one hand, to protect EU manufacturers from competitive disadvantages due to the EU emissions trading system in these industries and, on the other hand, to prevent the migration of EU manufacturers to third countries with this regulation.
Since 2005, the EU has been using the ‘Cap & Trade’ principle to guide the reduction of greenhouse gas emissions through the EU Emissions Trading System (EU ETS). Starting with an annual cap on CO2 emissions, which undergoes a gradual reduction, the EU-wide trade of CO2 certificates follows a market-driven pricing system. If the purchased CO2 certificates are not sufficient for the annual production of greenhouse gases, the emitters are ‘fined’. As the EU ETS is already in the phase of ‘auctioning’, it is possible to buy certificates if the demand is higher than originally forecasted. Those who successfully reduce their greenhouse gas emissions have a choice: surplus CO2 certificates can be used for the following year or sold through the so-called climate exchange, which is an economically attractive incentive.
Since not only all EU member states but also Iceland, Liechtenstein, and Norway (EEA-EFTA states) have joined this emissions trading system, imports of goods into the EU from these countries will not be covered by the CBAM. Similarly, products originating from Switzerland will be exempt. Switzerland introduced an emission trading system in 2008, which is known as the world’s smallest system of its kind and is based on the EU ETS. In 2020, it was linked to the EU ETS.
Outside of Europe, according to the German Emissions Trading Authority (DEHSt), emissions trading systems have emerged and are planned in numerous states and regions. In the United States, several states have joined together in the Regional Greenhouse Gas Initiative to form a cross-regional trading system. There are also cross-border connections with Canada’s systems. Tokyo stands out in Japan with its own municipal system, while South Korea already introduced a national emissions trading system in 2015. New Zealand focused on emissions resulting from agriculture. China is currently running pilot projects, and Kazakhstan and Mexico already have their own ETS. Further information on current systems can be found on the website "International Carbon Action Partnership" under ‘Welcome to the ICAP ETS Map’.
Besides carbon dioxide, methane, and nitrous oxide, perfluorocarbons (PFCs), also known as perfluorinated hydrocarbons, are also considered as climate-damaging greenhouse gases mainly produced in aluminum production. They are attributed to high greenhouse gas potential similar to chlorofluorocarbons (CFCs). Given this global dimension, the worldwide common goal of reducing these pollutants may be achieved through the integration of all ETS, at least according to some visions. Despite the shared climate policy goals, the EU must also adhere to WTO trade conditions and prevent unfair discrimination against certain countries. Continuous international negotiations and developments are expected in this regard. In an ideal world, more free trade agreements implementing sustainability concepts would be reached, as the EU recently accomplished in the free trade agreement with New Zealand.
Which goods are affected by the CBAM?
The current EU CBAM regulation provides for a self-contained list of goods that are subject to the CBAM. The allocation of a good is made, as usual in customs traffic, based on the so-called Combined Nomenclature commodity code.
Excerpt from the goods catalogue:
For the cement sector
2523 10 00 — Cement clinkers, carbon dioxide; 2523 21 00 — White Portland cement, including artificially colored;
2523 29 00 — Other Portland cement, carbon dioxide; 2523 90 00 — Other hydraulic blocks of cement;
Electricity under subheading 2716 0000 KN
For the fertilizer sector
2808 00 00 — Nitric acid; sulphonitric acids; 2814 — Anhydrous ammonia or in aqueous solution; 2834 21 00 — Potassium nitrate; 3102 — Mineral or chemical fertilizers, nitrogenous; 3105 — Mineral or chemical fertilizers, phosphatic, containing two or three of the fertilizing elements nitrogen, phosphorus, and potassium; other fertilizers;
Goods of this chapter in tablets or similar forms or in packages with a gross weight of 10 kg or less (except 3105 60 00 — Mineral or chemical fertilizers containing both the fertilizing elements phosphorus and potassium)
For the aluminum sector
7601 — Unwrought aluminum; 7603 — Aluminum powders and flakes; 7604 — Aluminum bars, rods, and profiles; 7605 — Aluminum wire; 7606 — Aluminum plates, sheets, and strip, thicker than 0.2 mm; 7607 — Aluminum foil (whether or not printed, or backed with paper, paperboard, plastics or similar backing materials), thickness (excluding any backing) not exceeding 0.2 mm; 7608 — Aluminum tubes and pipes; 7609 00 00 — Aluminum tube or pipe fittings (for example, couplings, elbows, sleeves);
For the sector of iron and steel
72 — Iron and steel; excluding: 7202 — Ferroalloys; 7204 — Waste and a scrap of iron or steel; remelting scrap ingots and steel; 7301 — Sheet piling of iron or steel, whether drilled, punched, or made from composite or multiple pieces; welded angles and sections of iron or steel;
Anyone intending to import these goods must register in the EU-level registration system. Similar to the EU ETS, import forecasts must be made to acquire sufficient CO2 certificates for the goods imports promptly. In the first years, starting in 2023, importers will initially only report on their climate-harmful imports. This transitional phase will end on December 31, 2025. Starting in 2026, the goods-specific CO2 certificates will then become a significant import requirement. While the EU member state border customs authorities will be responsible for controlling proper goods imports, the administration of certificates will be carried out by the same authorities responsible for the EU ETS today. In Germany, this responsibility falls within the scope of the Federal Environment Agency. Importers in Germany will then annually report the total quantity of goods imported in the previous year and the emissions associated with them to the DEHSt and return their purchased certificates accordingly.
In addition to this reporting requirement, affected companies will also have to undertake further efforts: Information on the emissions associated with the production of the goods should be provided by the manufacturers in third countries. It is the responsibility of the importer to obtain this information. However, the CBAM regulation also provides standard values of CO2 emissions that importers can use for their calculations. If such calculations are higher than the actual emissions, adjustments can be made afterwards. In a reconciliation procedure, the number of required CO2 certificates can be reduced if precise proof of the CO2 emissions for the imported goods is provided.
As the CBAM applies to imports into the EU, the German territories of Büsingen and Heligoland are exempt from its scope. They do not belong to the customs territory of the European Union. The same applies to the territories of Livigno, Ceuta, and Melilla, which are part of the territory of Italy or Spain, but not of the EU customs territory.
There are still various ‘fine-tuning’ adjustments to be made in this area. For example, the European Committee of the Regions addressed the adaptation of the EU ETS and the CO2 border adjustment mechanism to the needs of EU cities and regions. In its opinion on this matter, in August of this year, it called for the EU ETS to eliminate the currently practiced exemption of vulnerable sectors through free allowances. This is argued on the basis that the free allocation of CO2 certificates is contrary to the signaling effect of CO2 pricing.
The further development around this topic remains exciting. Because characterised by monitoring, reporting, and verification, sustainability systems are constantly evolving, and regular adjustments are to be expected.
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