The Carbon Border
Adjustment Mechanism

In May 2023 the European Commission issued the Carbon Border Adjustment Mechanism (CBAM). The CBAM is a second emission trading scheme for importers and represents the first Border Adjustment for carbon pricing in the world. The CBAM will be phased in starting October 1, 2023, and will require EU companies that import certain products from non-EU countries to determine the CO2 emissions contained in those imports and then purchase a corresponding number of CBAM allowances. In this way, imports from non-EU countries are charged the same CO2 price as if they had been produced in the EU.

Is your company affected by the new CBAM regulation?

Initially, the CBAM is affecting specific sectors that are emission intensive and trade exposed. In some sectors, a lot of downstream products like doors and windows, cans, boxes or even screws, bolts and similar articles are affected as well. The scope of the CBAM will be expanded step by step. The initial 6 affected sectors are:

Cement

Aluminium

Iron and Steel

2601 12 00 – Agglomerated iron ores and concentrates, other than roasted iron pyrites

7201 – Pig iron and spiegeleisen in pigs, blocks, or other primary forms - Some products under 7205 (Granules and powders, of pig iron, spiegeleisen, iron, or steel) may be covered here

7202 1 – Ferro-manganese

7202 4 – Ferro-chromium

7202 6 – Ferro-nickel

7203 – Ferrous products obtained by direct reduction of iron ore and other spongy ferrous products

7206 – Iron and non-alloy steel in ingots or other primary forms (excluding iron of heading 7203)

7207 – Semi-finished products of iron or non-alloy steel

7218 – Stainless steel in ingots or other primary forms; semi- finished products of stainless steel

7224 – Other alloy steel in ingots or other primary forms; semi- finished products of other alloy steel

7205 – Granules and powders, of pig iron, spiegeleisen, iron or steel (if not covered under category pig iron)

7208 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated

7209 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, cold-rolled (cold-reduced), not clad, plated or coated

7210 – Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, clad, plated or coated

7211 – Flat-rolled products of iron or non-alloy steel, of a width of less than 600 mm, not clad, plated or coated

7212 – Flat-rolled products of iron or non-alloy steel, of a width of less than 600 mm, clad, plated or coated

7213 – Bars and rods, hot-rolled, in irregularly wound coils, of iron or non-alloy steel

7214 – Other bars and rods of iron or non-alloy steel, not further worked than forged, hot-rolled, hot-drawn or hot-extruded, but including those twisted after rolling

7215 – Other bars and rods of iron or non-alloy steel

7216 – Angles, shapes and sections of iron or non-alloy steel

7217 – Wire of iron or non-alloy steel

7219 – Flat-rolled products of stainless steel, of a width of 600 mm or more

7220 – Flat-rolled products of stainless steel, of a width of less than 600 mm

7221 – Bars and rods, hot-rolled, in irregularly wound coils, of stainless steel

7222 – Other bars and rods of stainless steel; angles, shapes and sections of stainless steel

7223 – Wire of stainless steel

7225 – Flat-rolled products of other alloy steel, of a width of 600 mm or more

7226 – Flat-rolled products of other alloy steel, of a width of less than 600 mm

7227 – Bars and rods, hot-rolled, in irregularly wound coils, of other alloy steel

7228 – Other bars and rods of other alloy steel; angles, shapes and sections, of other alloy steel; hollow drill bars and rods, of alloy or non-alloy steel

7229 – Wire of other alloy steel

7301 – Sheet piling of iron or steel, whether or not drilled, punched or made from assembled elements; welded angles, shapes and sections, of iron or steel

7302 – Railway or tramway track construction material of iron or steel, the following: rails, check-rails and rack rails, switch blades, crossing frogs, point rods and other crossing pieces, sleepers (cross-ties), fish- plates, chairs, chair wedges, sole plates (base plates), rail clips, bedplates, ties and other material specialised for jointing or fixing rails

7303 – Tubes, pipes and hollow profiles, of cast iron

7304 – Tubes, pipes and hollow profiles, seamless, of iron (other than cast iron) or steel

7305 – Other tubes and pipes (for example, welded, riveted or similarly closed), having circular cross-sections, the external diameter of which exceeds 406,4 mm, of iron or steel

7306 – Other tubes, pipes and hollow profiles (for example, open seam or welded, riveted or similarly closed), of iron or steel

7307 – Tube or pipe fittings (for example, couplings, elbows, sleeves), of iron or steel

7308 – Structures (excluding prefabricated buildings of heading 9406) and parts of structures (for example, bridges and bridge- sections, lock- gates, towers, lattice masts, roofs, roofing frameworks, doors and windows and their frames and thresholds for doors, shutters, balustrades, pillars and columns), of iron or steel; plates, rods, angles, shapes, sections, tubes and the like, prepared for use in structures, of iron or steel

7309 – Reservoirs, tanks, vats and similar containers for any material (other than compressed or liquefied gas), of iron or steel, of a capacity exceeding 300 l, whether or not lined or heat- insulated, but not fitted with mechanical or thermal equipment

7310 – Tanks, casks, drums, cans, boxes and similar containers, for any material (other than compressed or liquefied gas), of iron or steel, of a capacity not exceeding 300 l, whether or not lined or heat-insulated, but not fitted with mechanical or thermal equipment

7311 – Containers for compressed or liquefied gas, of iron or steel

7318 – Screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles, of iron or steel

7326 – Other articles of iron or steel

Electricity

Fertilizers

Hydrogen

Do the CBAM regulations apply to you?

Use this first quick check to see if you are affected by the CBAM regulations and are therefore required to take further action.

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CBAM REQUIREMENTS

What does this mean for you and your company?

From January 2026 onwards only authorized CBAM declarants are allowed to import products that are affected by the CBAM regulation. Therefore, you as a company need to apply to receive this status. When granted, you first need to regularly (i.e. on an annual basis) report the emission embedded in your imports. To be able to calculate these emissions you need to know how much emissions were set free by the production of the goods. Based on these emissions embedded in your imports you will be obliged to buy and report CBAM certificates. Second, at the end of each quarter you need to hold at least 80% of the certificates corresponding to your imports.

In short, following requirements apply as of 1st January 2026:

You need to register as an authorized CBAM declarant.

You require specific emission data for your imported goods from your non-EU suppliers.
You need to calculate the amount of emissions and purchase CBAM certificates on a quarterly basis.
You must create your CBAM and Certificates reports and submit them to your local authority.

UNDERSTANDING THE CBAM TRANSITIONAL PHASE

What do you need to consider now?

The CBAM is put into place with a transitional phase that starts on 1st October 2023 and lasts until 31st December 2025. During that period, the European Commission wants to collect data to improve the CBAM provisions later on. Therefore, EU companies that fall under the CBAM regulation will already need to report the actual emissions embedded in their imports with the European Commission clearly stating that just reporting standard values will not be sufficient. Even though purchasing CBAM certificates is not yet required in the transitional period, sanctions may apply if reporting requirements are not met. Hence, it is crucial to receive specific supplier data on carbon emitted during the production process.

CBAM Timeline

1st October 2023

Start of transitional phase of CBAM

EU companies are required to report emission data and other additional information regarding their imported goods.

31st January 2024

Deadline for the first report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q4 2023.

31st April 2024

Deadline for the second report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q1 2024.

31st July 2024

Deadline for the third report and end of limitless applicability of default values for emission data

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q2 2024. This is the last report where companies are allowed to fully use standard emission values.

From 1st August 2024

Restriction for the use of standard emission values

Standard values may only be used for up to 20% of the total emissions of a complex good.

31st October 2024

Deadline for the fourth report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q3 2024.

31st December 2024

Further restrictions for the use of standard emission data

Emission data collected by an emission trading scheme or a mandatory emission monitoring scheme at the respective installation is no longer accepted.

From 1st January 2025

New regulations for emission data

Only emission data calculated in accordance with the unique CBAM method may now be used.

31st January 2025

Deadline for the fifth report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q4 2024.

31st April 2025

Deadline for the sixth report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q1 2025.

31st July 2025

Deadline for the seventh report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q2 2025.

31st October 2025

Deadline for the eigth report

Report needs to be submitted to your relevant local authority - including all CBAM relevant imports from Q3 2025.

31st December 2025

End of transitional phase

The CBAM transitional phase ends and requirements for certificate purchase and reporting come into force the next day.

1st January 2026

Full implementation of the CBAM

The transitional phase has ended and EU companies now need to consider all CBAM requirements, including certificate purchase and reporting.

Regarding the operational mechanisms of the CBAM

The CBAM complements the European Emissions Trading Scheme by mirroring its approach to free allocation.

The sectors significantly impacted by this, due to their high emissions and exposure to trade, encompass aluminum, cement, electricity, hydrogen, fertilizers, iron, and steel. The range of affected products is defined by their CN codes, which can be found in the regulation's annex. It is anticipated that this list will likely see expansions in the coming years.

Transitional phase starting in October 2023

During the transitional phase from October 1st, 2023, to December 31st, 2025, importers of goods in these sectors are only required to report direct and indirect emission data, along with specific information and parameters related to the production process. They should also provide information about any potential CO2-related costs incurred during the production of the goods in the third country. These reports need to be submitted quarterly to the Commission. Importantly, during this transitional phase, there is no obligation to purchase emission certificates. To allow companies sufficient time to adapt to the new regulations, there will be some initial adjustments at the start of the transitional period. Until July 31st, 2024, it will be permissible to use default values or data collected from emissions trading schemes or mandatory monitoring schemes in the country where the production facility is located if actual data is unavailable. After this date, default values can only be applied for emissions up to a limit of 20% of the total emissions for each complex product. Furthermore, data from local reporting systems will only be applicable until December 31st, 2024. Consequently, from January 1st, 2025 onward, only CBAM-specific calculation methods will be utilized. The primary goal of the European Commission during the transitional phase is to gather essential data for the full implementation of CBAM in 2026. Consequently, authorities are particularly keen on obtaining up-to-date emission data. Calculating the requisite emission data is a multifaceted process, with variations depending on the aggregated goods categories. Different approaches may be employed based on the characteristics of the production facility. In cases where CO2 emissions are omitted from the report, yet are embedded in the imported goods and have not been reported, importers may face sanctions ranging from €10 to €50 per ton of missing emissions.

Phase of full implementation from 2026 onwards

Starting from January 1st, 2026, only importers registered as authorized CBAM declarants will be permitted to import goods subject to CBAM regulations. Upon full implementation of CBAM in 2026, the obligation to purchase certificates will come into effect. Importers will be required to acquire one certificate for each ton of CO2 embedded in the imported goods. The pricing of CBAM certificates will be tied to the EU ETS certificate prices. However, in line with CBAM's goal of leveling the playing field without imposing additional burdens on imports, any previously paid CO2 fees in the country of production will be taken into account, reducing the required number of CBAM certificates. This principle also applies to the ongoing free allocation of EU ETS certificates, which will be gradually phased out by 2034 through a designated CBAM-factor. Corresponding to this factor, the obligation to purchase CBAM certificates will be gradually introduced. Only in 2034 will importers be fully responsible for covering the entire cost of CBAM certificates.

However, merely submitting the correct number of certificates annually will not suffice. Importers will also be required to maintain 80% of the requisite certificates for emissions embedded in imported goods on a quarterly basis. Starting in 2026, the CBAM report will be replaced by the CBAM declaration. This declaration will encompass essentially the same information as the report but will only need to be submitted annually.

Additionally, starting in 2026, importers will be required to have the calculation of emission data verified by an accredited verifier. However, there is an allowance to use default values limitlessly for reporting and calculating embedded emissions. It's important to note that these default values are calculated in a way that results in higher embedded emissions than using actual emission data. Consequently, using default values will necessitate the purchase of more certificates, making them a costly option. The entire process will be subject to scrutiny by the European Commission. If an insufficient number of certificates are submitted, importers will be required to purchase them within the subsequent month. Furthermore, importers will face sanctions for each missing certificate, with sanctions being calculated in a manner similar to that for exceeding emission limits under the European Emissions Trading Scheme.

Seems challenging? Indeed, it is. However, at kolum, we are committed to assisting you in achieving CBAM regulation compliance as seamlessly as possible.

Carbon Leakage or: Why CBAM is necessary

Carbon leakage is describing the effect of wandering of greenhouse gas emissions to third countries. It can occur through two channels.

The first channel relates to international trade: if only one country implements an ambitious climate protection policy, the production costs for companies in that country increase. Consequently, their environmentally friendly products are at a competitive disadvantage when competing with products from other countries that are not subject to such regulations. This is true in both the import and export markets. For the climate-damagingly produced products from countries that do not have comparable regulation, this is good. It gives them a competitive advantage, which leads to greater sales. In turn, greater sales lead to greater production of these environmentally harmful goods. However, as production expands, greenhouse gas emissions also increase accordingly. In this respect, the ambitious climate policy does help to reduce emissions in the own, implementing country, but at the same time leads to an increase in emissions in third countries.

The second channel through which carbon leakage may occur is market-driven. When a major economy implements emission reduction regulations, it consequently reduces the demand for fossil fuels. This reduced demand, in turn, leads to a decline in the global market price for these fuels, which subsequently triggers a resurgence in demand for fossil fuels in other countries. The heightened consumption of fossil fuels is accompanied by an increase in emissions output in these other nations.

In a worst-case scenario, carbon leakage could potentially result in a global increase in total greenhouse gas emissions.

There are various options available for mitigating the impact of carbon leakage.

The primary and widely regarded as the most effective approach is to address the global climate crisis at its root. In 1992, the international community of nations took a significant step by establishing the United Nations Framework Convention on Climate Change (UNFCCC). This framework set the stage for annual meetings of member states to negotiate specific actions, commonly referred to as the Conference of Parties (COP), which often garners media attention. The turning point came in 1997 during the Kyoto conference when a groundbreaking agreement was reached, known as the Kyoto Protocol. This historic treaty, which came into force in 2005, marked the first instance where industrialized nations were bound by fixed obligations to reduce greenhouse gas emissions. In the period from 2008 to 2012, a reduction of 5% should be achieved compared to the 1990 level. It's worth noting that in response, the European Union established its European Emissions Trading Scheme in 2005 to fulfill its Kyoto Protocol commitments. However, the scheme faced challenges as significant emitters like the United States opted not to participate, and Canada eventually withdrew from the treaty when it became apparent it could not meet its reduction targets.

The next significant milestone came in 2015 with the signing of the Paris Agreement. This historic treaty boasts participation from over 190 countries, making it a truly global initiative. Under the agreement, parties committed to limiting global warming to a maximum of 2°C. Notably, even developing nations agreed to take steps toward climate protection, despite the primary responsibility for the climate crisis lying with industrialized countries. However, in order to secure the broad consensus required for the agreement, emission reduction commitments were not set in stone. Instead, each participating country retains the flexibility to determine its own measures to combat climate change. Regrettably, the Intergovernmental Panel on Climate Change continues to caution that the current efforts fall short of meeting the Paris Agreement's objectives. As a result, progress under this multilateral approach remains challenging and slow.

On the flip side, a country committed to advancing climate protection can also take unilateral actions independently. The challenge of carbon leakage, particularly in trade, arises due to disparities in regulatory standards among countries engaged in trade. To address this, the country with the ambitious climate policy could consider aligning its standards with those of the third country. This alignment might be achieved through measures such as tax incentives or exemptions based on the prevailing regulations. For instance, the European Union currently employs this strategy through the allocation of emission certificates within the European Emission Trading Scheme for industries characterized by high emissions and exposure to international trade. However, it's essential to bear in mind that such efforts to combat carbon leakage can compromise the ecological effectiveness of climate protection regulations and impede the broader fight against the climate crisis.

As a response to this challenge, the European Union has initiated the establishment of the Carbon Border Adjustment Mechanism (CBAM) to ensure equitable climate regulation at the elevated standards set within the European Union. This is the only way to prevent carbon leakage while at the same time effectively combating the climate crisis

What can kolum do for you?

kolum is your one-stop software solution for the Carbon Border Adjustment Mechanism. Our end-to-end solution allows you to manage all things CBAM conveniently in one place.

Import Management

Interested?

Schedule a demo and we’ll get back to you within 24 hours.

Is your company affected by the new CBAM regulation?

Do the CBAM regulations apply to you?

CBAM REQUIREMENTS

What does this mean for you and your company?

UNDERSTANDING THE CBAM TRANSITIONAL PHASE

What do you need to consider now?

CBAM Timeline

Regarding the operational mechanisms of the CBAM

Phase of full implementation from 2026 onwards

Carbon Leakage or: Why CBAM is necessary

There are various options available for mitigating the impact of carbon leakage.

What can kolum do for you?

Import Management

Get emission data from your suppliers

Automated Emission Calculation

Report Submission and Management

CBAM Declarant Registration

CBAM Certificate Management

Interface to ERP solutions

EU Company Representatives

Frequently Asked Questions

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