Carbon Border Adjustment Mechanism (CBAM) is an initiative of the European Union (EU) that has attracted significant interest and attention worldwide. Russian companies are also monitoring the European Union’s climate regulatory framework, as it is part of the global economy in which Russian organizations also operate.
CBAM is a mechanism developed by the EU to combat climate change and reduce greenhouse gas emissions by economically compensating for so-called “carbon leakage” that occurs when EU countries purchase carbon-intensive products from countries where carbon regulation is poorly developed. The mechanism introduces a system of taxes on carbon emissions for imported goods (that is, products manufactured with high greenhouse gas emissions will be taxed when imported into the EU). CBAM can be compared to a customs duty on imported products that depends on the volume of direct greenhouse gas emissions generated during their production.
Which products are covered by CBAM?
Six product categories are currently subject to mandatory CBAM regulation:
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cement;
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iron and steel;
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aluminum;
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fertilizers;
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electricity;
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hydrogen.
These product categories were not chosen at random: they are the most carbon-intensive, meaning that their production generates significant greenhouse gas emissions. Moving carbon-intensive products between countries causes cross-border carbon leakage. Preventing this leakage is the principal purpose of introducing CBAM in the EU.
“Carbon leakage” (or “emissions leakage”) refers to greenhouse gas emissions generated when products are manufactured outside the EU, in countries with less stringent carbon regulation. Leakage occurs when manufacturers relocate production from countries with stringent carbon-reduction measures to regions where such measures are less developed or entirely absent. As a result, these production facilities are not subject to the regulatory framework governing greenhouse gas emission reductions and reporting. In reality, however, aggregate greenhouse gas emissions across the supply chain do not decrease because production capacity outside the EU has no incentive to pursue low-carbon development. In addition, imported products whose prices do not include carbon-emission taxes reduce the competitiveness of products made by manufacturers within the EU.
Thus, the introduction of CBAM will increase the competitiveness of the EU’s own products, prevent carbon leakage, and encourage manufacturers to reduce greenhouse gas emissions from production.
How is the tax determined under CBAM?
The tax directly depends on the quantity of greenhouse gas emissions generated in producing the imported goods. The calculation accounts for direct Scope 1 emissions associated with the production technology and, during the transitional period, indirect emissions from purchased energy used to manufacture the products.
How is the tax paid?
As payment for emissions, CBAM provides for the purchase of so-called CBAM certificates on the EU ETS (EU Emissions Trading System) market. One certificate will cover the emissions of one metric ton of CO2e. The price of a certificate will equal the price of a carbon allowance on the EU ETS market. For example, as of January 31, 2024, one CBAM certificate would have cost €63.38 (according to the https://carboncredits.com/ information platform).
When determining the amount for which CBAM certificates must be purchased, payments made for exceeding CO2e emissions quotas or carbon allowances purchased in the product’s country of origin may be taken into account. Thus, if a manufacturer can prove that it has already paid a price for a certain quantity of excess CO2e emissions under the carbon regulations of the country where production is located, the corresponding quantity of emissions may be deducted from the tax amount (this procedure is established by Article 7 of EU Commission Implementing Regulation 2023/1773). In this case, importers will have to purchase certificates not for the full tax amount, but only for the difference between the emissions calculated under CBAM and the emissions already paid for before the products were imported into the EU.
For example, in the Russian Federation, some embedded Scope 1 emissions may be “offset” by accounting for the mandatory quota under Federal Law No. 296 “On Limiting Greenhouse Gas Emissions” (as of today, payments for exceeding emissions quotas exist for the Sakhalin Region).
When will CBAM take effect?
The CBAM requirements will take full effect on January 1, 2026. From that point onward, manufacturers will have to calculate greenhouse gas emissions from production, declare the quantity of goods imported into the EU, and pay taxes by purchasing the corresponding number of CBAM certificates.
However, the transitional period for implementing CBAM has already been underway since October 1, 2023 and is governed by EU Commission Implementing Regulation 2023/1773. Under the Regulation, during this period an importer only needs to submit quarterly reports that will include, among other things, the following information:
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The total quantity of each type of imported goods included in the CBAM list (in MWh for electricity or in metric tons for other types of goods);
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The actual embedded emissions of the products accounted for as direct emissions from their production (in metric tons of CO2e/MWh for electricity or metric tons of CO2e/metric ton for other types of goods). Under the CBAM methodology, embedded emissions mean the product’s specific carbon footprint, that is, the quantity of carbon emitted in creating the product;
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Total indirect emissions (including the quantity of electricity consumed and the applicable emission factors);
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The price of embedded carbon emissions in the manufacturer’s country if carbon taxation has already been applied to the imported goods.
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The first quarterly report following the start of the transitional period had to be submitted by January 31, 2024. Additions and corrections to the submitted report could be made through July 31, 2024. This gives declarants an opportunity to adapt more flexibly to the new emissions calculation and reporting methodologies.
Beginning January 1, 2026, importers will be required to register as authorized declarants and begin purchasing CBAM certificates for imported CO2e emissions. Mandatory annual emissions declarations will be introduced during this period (that is, an annual CBAM declaration containing specific data, including a verified calculation of the embodied carbon footprint).
Under CBAM, imports of goods must be accompanied by registration of the declarant.
Taxation procedure under CBAM
The general taxation procedure under CBAM can be presented as follows:
Calculating the carbon footprint
Manufacturers of goods imported into the EU are advised to calculate the carbon footprint of their products. Specific greenhouse gas emissions calculation methodologies have been established for each type of product covered by CBAM requirements. To simplify calculations, a calculator is available on the EU website and is currently being refined. Manufacturers provide the calculated embedded-emissions values to the importers of the products into the EU.
Registration in the CBAM registry
Importers filing customs declarations must register in the registry of authorized CBAM declarants.
Submitting CBAM reports
The completed report, containing information on the volumes of products purchased, direct and indirect emissions, the products’ embedded emissions, and other required information, is submitted for review through the CBAM Reporting Declarant Portal (https://cbam.ec.europa.eu/declarant):
Photo: https://cbam.ec.europa.eu/declarant
Audit and verification
The results of calculating a product’s carbon footprint may be audited and verified. This ensures the accuracy and reliability of the information provided.
To confirm the accuracy of the reports, an importer may use the services of an independent accredited verifier. This increases confidence in the data submitted and reduces the importer’s risk of being fined for incorrect reporting. Verification will remain voluntary only during the transitional period. Beginning January 1, 2026, verification of reports by accredited verifiers will become mandatory. Requirements for verifiers, as well as systems of fines and penalties for incorrect reporting, are currently being developed.
Determining the tax rate
The tax rate for a specific product is determined on the basis of carbon-footprint calculations. The calculation of the tax rate accounts for emissions payments made by the manufacturer in the region where the product was manufactured under local carbon regulations.
Collecting the tax
The established tax is paid when product importers purchase and surrender a specified number of CBAM certificates. The certificates will be purchased through the EU ETS, and their price will equal the price of a carbon allowance on the EU ETS market. The specific mechanisms for purchasing certificates have not yet been established; they will be developed during the transitional period for implementing the CBAM system.
The CBAM system will be continuously improved during implementation. The list of goods subject to CBAM requirements, as well as the emissions categories that must be accounted for, will expand. It is planned that by 2034, 100% of the embedded emissions of imported products will be taxed. It is therefore strategically important for all companies supplying products to the EU to calculate greenhouse gas emissions and declare them in accordance with CBAM requirements.
Article author:
Marina Kupriyanova