Carbon Border Adjustment Mechanism

CBAM is one of the initiatives included the EU’s ‘Fit for 55’ suite of measures that seeks to deal with the issue of carbon leakage. Carbon leakage occurs when, due to the expense of complying with the EU’s stringent climate policies, manufacturers may seek to move their carbon intensive operations to jurisdictions with more lax climate regulations thus undermining the EU’s anti-climate change measures. CBAM will affect imports of iron/steel, aluminium, cement, fertiliser, electricity and hydrogen and will complement the EU’s main emission reduction scheme, i.e., the Emissions Trading Scheme (“ETS”). 

Currently, an ETS operates for certain domestic installations within the EU. As part of this scheme, the level of greenhouse gas (“GHG”) emissions within the EU are capped on an annual basis. This cap on emissions is being gradually reduced year-on-year. As the availability of ETS allowances decreases over time, the cost of emitting GHGs in the EU goes up. Therefore, without CBAM, an incentive exists to move manufacturing outside of the EU. CBAM will mirror ETS by placing a charge on carbon-intensive goods when they are imported into the EU. 

When fully implemented in 2026, importers will have to purchase CBAM certificates to cover the GHG emissions embedded in affected products being imported into the EU. CBAM therefore, will effectively equalise the cost of carbon emissions embedded in imported goods relative to those goods subject to the ETS and which are manufactured within the EU. 

In October 2023, the CBAM transitional period begins. During this time, there will be no charges levied on imports of affected goods but importers will have to report emissions data on a quarterly basis. The CBAM report shall be submitted via the CBAM Transitional Registry which will be available for use from the 1st of October 2023.

Though no CBAM charges will be imposed until January 2026, the introduction of CBAM will bring a new administrational burden on companies, many of whom are already struggling with staff shortages. Irish businesses that import CBAM goods from outside of the EU/EEA will be required to gather emissions data from their non-EU/EEA supplier and submit quarterly reports. With the first CBAM report due in January 2024, now is the time to understand what compliance with CBAM measures will mean for your company.

Irish businesses should now begin reviewing their supply chains. It is recommended to review the Combined Nomenclature (“CN”) codes of imported goods and ensure that the assigned codes are accurate. Then determine if these CN codes are listed in Annex I of Regulation (EU) 2023/956. If it emerges that your company has an exposure to CBAM, it will be necessary to ask your non-EU supplier to provide emissions data.