We are witnessing an unstoppable process of decarbonisation of the European economy. As the EU's climate ambition increases, new rules and updated EU legislation are needed to make the ecological and energy transition a reality.

The European Union Emissions Trading System (EU ETS) has functioned, to date, as the system for reducing industrial CO2 emissions in Europe. This system basically means that installations in the emitting sectors (refineries, iron, steel, aluminium, cement, glass, paper, ceramics, the chemical industry, gas production or air transport) must purchase and surrender several emission allowances equivalent to the CO2 emitted in a year.

However, insofar as the EU ETS may give an unfair advantage to imported products or products from third countries in international markets that are less clean but more competitive than European ones, the solution adopted by the European Commission to protect those sectors at risk has consisted of allocating emission allowances free of charge to those industries with the greatest risk of carbon leakage. As a result, de facto, the current system does not incentivise the mitigation of carbon emissions from those European production sectors exposed to carbon leakage.

As part of the European Green Deal strategy to achieve climate neutrality by 2050, the EU's "Fit for 55" legislative package, announced in July 2021, proposes a series of measures with the aim of reducing emissions by at least 55% by 2030 from 1990 levels. The adoption of Regulation (EU) 2023/956 of the European Parliament and of the Council of 10th May 2023 establishing a Carbon-Border Adjustment Mechanism (hereafter "CBAM Regulation") on 16th May is an important milestone in the reform of the EU ETS and in the fight against carbon leakage.

What is CBAM and who does it apply to?

The CBAM is a complement to the greenhouse gas emissions trading scheme that aims to avoid the risk of carbon leakage by ensuring that imported products are subject to a regulatory regime that applies equivalent carbon costs to those borne under the EU ETS.

Therefore, while the EU ETS applies to EU-based installations, the CBAM will function as a kind of tariff that will apply to certain products imported into the EU from third countries (with the exception of Iceland, Liechtenstein, Norway and certain special territories such as Ceuta and Melilla in Spain).

As provided for in Annex I of the CBAM Regulation, the mechanism will cover the following product categories:

• Kaolin and other kaolinic clays, calcined
• Cement, aluminous cement, cement clinker, etc.
• Fertilisers (e.g., ammonia, nitric acid, sulphonic acids)
• Agglomerated iron ores and concentrates
• Full coverage of steel products (except some ferro-alloys, scrap, etc.).
• Iron and steel products include derived products such as screws, bolts, nuts, coach screws, screw hooks, rivets, pins, dowels, cotter pins, washers and similar items.
• Aluminium structures and parts of structures
• Certain aluminium tanks, reservoirs, vats, tanks and containers
• Stranded wire, ropes, cables, plaited bands, plaited bands and the like, of aluminium, not electrically insulated
• Other articles of aluminium
• Hydrogen
• Electrical energy

This list of products has been significantly increased compared to the draft versions of the CBAM Regulation and may even be extended in the coming years to incorporate products such as polymers or chemicals. In fact, the current list includes not only raw and semi-finished materials but also derived products, so that CBAM will apply to many companies. The most affected manufacturing sectors are expected to be the automotive, construction, metallurgy or machinery sectors, which use the products covered by CBAM as raw materials.

How is CBAM implemented?

Importers will have to report the total verified greenhouse gas emissions embedded in imported goods in one year. After the transitional period, the financial impact of CBAM will gradually increase, with a phase-in of costs until 2034. A reduction in the price to be paid may be requested if the carbon price has already been effectively paid in the country of origin and the importer can prove this.

Payment will be made through the purchase and delivery of CBAM certificates, the price of which will be set based on the weekly averages of the EU ETS allowance auctions. During the year, the importer must ensure that the number of CBAM certificates in his CBAM registry account at the end of each quarter corresponds to at least 80% of the emissions embedded in the products imported since the beginning of the year.

If actual emissions are declared, they shall be accredited by independent verifiers. If actual emissions are not available, standard values reflecting the average emissions of a given product manufactured in a specific country or region shall be used. If reliable data are also not available to determine these standard values, the Commission will determine default values based on the worst performing installations in the EU.

What obligations are imposed?

A transitional regime will apply from 1st October 2023 until 31st December 2025. Under this period, importers (or their proxies) will be required to report quarterly on the total quantity and type of goods per production installation in the country of origin, the emissions embedded in the imported goods during that period, detailing direct and indirect emissions where relevant, as well as any carbon price actually paid in a third country.

Furthermore, from 31st December 2024, importers must have the status of "authorised CBAM declarant" to be able to import the goods covered by the scope.

On 13th June the Commission published its draft implementing regulation (open for public consultation until 11th July) to detail the information to be provided in these reports, the applicable penalty regime and the calculation methods for determining the implied emissions of imported goods, which will have to be determined based on current emissions, unless this is not possible and must be determined on the basis of default values.

Regarding the penalty regime, it should be noted that the CBAM Regulation empowers the competent authority designated by the Member State in question (to be defined in Spain) to impose an effective, proportionate and dissuasive penalty on the importer or customs representative who fails to comply with the reporting obligation, either for failure to submit the report or because the report is incomplete or contains incorrect data.

First conclusions

In Spain, imports of iron and steel from countries such as China and Turkey are particularly important in sectors like the automotive and metallurgy. There is no doubt that higher costs may affect competitiveness  in the domestic and global market for companies with higher volumes of emissions.

Given that the CBAM may pose a barrier to current trade flows, we could also expect possible countermeasures by the EU's trading partners that could end up harming European exports, also considering that the current mechanism does not provide for carbon price exemptions for exporting companies.

Beyond these possible perverse effects, preparation for the new quarterly reporting obligations will require immediate action by the companies concerned to identify imports covered by the CBAM, as well as to prepare for the reporting requirements of the transition period. The potential financial impact of CBAM will need to be assessed strategically and based on the current supply chain to take appropriate mitigation measures where possible.

You can download the document here.

For more information you may contact:

Carlos Mínguez |  Partner at Andersen
Energy & Natural Resources
Public and Regulatory Law
carlos.minguez@es.Andersen.com

Mar Guardiola | Director at Andersen
Customs & Environmental taxes
Tax Law
mar.guardiola@es.Andersen.com