EC releases reporting obligations under CBAM, seeks feedback

The European Commission published a draft of reporting obligations and regulations that will govern its new carbon border tax, which begins its transitional phase Oct. 1.

The EC also launched a public consultation June 13 for feedback from companies on its Carbon Border Adjustment Mechanism, which will levy a carbon tax on imports of selected energy-intensive materials and products into the EU, removing the gap between the carbon price under the EU Emissions Trading System and the export country of origin's carbon price.

The draft, known as the CBAM Implementing Regulation, gives details on the reporting obligations and information sought from EU importers of CBAM goods, as well as the provisional methodology for calculating embedded emissions released during the production process of these goods.

"In the CBAM's transitional phase, traders will only have to report on the emissions embedded in their imports subject to the mechanism without paying any financial adjustment," it said in a statement. "This will give time for businesses to prepare and will provide the necessary information to fine-tune the definitive methodology by 2026."

The goods covered by CBAM are iron, steel, cement, aluminum, fertilizers, electricity, and hydrogen, as well as indirect emissions under certain conditions. This mechanism will be phased in from 2026 until 2034 at the same speed as free allowances in the EU ETS are phased out.

The main purpose of this tax seems to be to push European industry to significantly decarbonize without being undercut by other geographies with no carbon costs.

Gradual approach

The EC said it is taking a "gradual" approach with "some flexibility" on the calculations of embedded emissions on imports, to allow producers time to adapt to this mechanism in a "predictable" manner.

"During the first year of implementation, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method); (b) reporting based on equivalent third country national systems; and (c) reporting based on reference values. As of [Jan. 1] 2025, only the EU method will be accepted," the statement said.

Feedback from the public consultation is welcome from business, academia, civil society, and the general public until July 11.

The EU's CBAM will have far-reaching effects on world trade and the wider energy transition.

Many in the industry believe the mechanism will push exporter countries to adopt domestic carbon prices, while some might challenge the measure at the WTO on protectionist grounds.

An S&P Global Commodity Insights analysis shows Canada, Brazil, South Africa, and Turkey will be most exposed to the mechanism, with iron and steel by far the biggest sector targeted.

"We may also see a reorientation and shuffling of global trade—where the lowest-emitting countries and producers shift a greater share of their exports to meet EU demand," S&P Global analysts said in a recent note. "Challenges to the legitimacy of CBAM as an environmental tool (and not a trade protectionist tool) through the WTO are possible, but unlikely to be successful."