What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) is one of a number of initiatives designed to help Europe achieve its target to become the world’s first climate-neutral continent by 2050. But what does it really mean for those importing metal into the EU or exporting from the UK?

By 2026, importers of specified carbon-intensive goods, including aluminium, iron, and steel, will be required to pay a levy on their imports into the EU. The levy coincides with the phasing out of ‘free allowances’ under the EU Emissions Trading Scheme (ETS), therefore bringing the carbon price of non-EU goods in line with those manufactured inside the EU.

Until then, importers based in the EU are required to report on the embedded carbon emissions of eligible goods that they are importing. Separately, UK exporters should be ready to provide the required information to help their customers meet their obligations, including commodity codes, country of origin, direct emissions, and indirect emissions.

The CBAM applies to imports of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen – which will capture more than 50 per cent of the emissions in ETS covered sectors once fully phased in.

The overarching objective of the CBAM is to address ‘carbon leakage’, which is the term when companies move carbon-intensive production abroad to countries where production is cheaper but where less-stringent climate policies are in place.

The ETS places a price on the emission of carbon in certain sectors and producers currently receive ‘free allowances’, which means that they are permitted to emit a specified amount of carbon before they start paying for it.

These free allowances are being phased out progressively until 2034 to support the EU’s carbon reduction targets, prompting fears that businesses losing their free allowances will shift production to countries without a carbon pricing system.

To combat this, the CBAM will place a price on the carbon emissions of goods imported into the EU to bring the carbon price on those goods in line with goods manufactured within the EU.

The CBAM initially applies to imports of specified goods into the EU; cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. This scope ensures that once fully phased in, the regulation will capture more than 50 per cent of the emissions in ETS covered sectors.

Specifically for those importing or exporting metal, the scope covers agglomerated iron ores and concentrates, as well as most iron and steel products, excluding some ferro-alloys and scrap. This includes screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, and washers (including spring washers).

Aluminium structures and parts of structures are also included, along with certain aluminium reservoirs, tanks, vats, and containers, plus stranded wire, cables, and plaited bands made of aluminium, if not electrically insulated.

It is important to note that this list has increased significantly since initial draft versions of the regulation – downstream products such as screws, bolts, and nuts were not previously included, for example.

It is also expected that the scope of eligible product categories will increase by 2030 to cover all categories currently subject to the EU. This would bring polymers, diverse chemicals, mineral oil products, paper and pulp under the scope of the CBAM.

The reporting requirements of CBAM change as the transition period progresses. Until the end of 2024, companies will have the choice of reporting in three ways:

• Full reporting according to the new methodology (EU method)
• Reporting based on an equivalent national method
• Reporting based on default reference values (only until July 2024)

From January 2025, only the EU method will be accepted.

UK businesses will not be required to report under the EU CBAM, or to pay the levy once it comes into force in 2026 (unless acting as an importer under their own name within the EU).

However, UK exporters will need to provide emissions data to EU customers so they can meet their own obligations. This should include the quantity of export, commodity codes, country of origin, direct emissions (from fuel combustion, waste gas, and process emissions) and indirect emissions (energy consumption).

They should also be considering how to reduce direct and indirect emissions to ensure that their products remain competitive once the CBAM levy applies.