Prepare for CBAM Compliance

The following is an article originally published May 24, 2024, by Steel Times International.

Prepare for CBAM Compliance

The European Union’s (EU) Clean Border Adjustment Mechanism (CBAM) is a landmark regulatory framework aimed at curbing emissions embedded in imported goods, including steel. By 2026, it will require steel importers to fully measure, report, and pay for these greenhouse gas (GHG) emissions, aligning imported goods with the stringency of the EU’s climate policies.

By Urszula Szalkowska

In anticipation of CBAM’s full implementation, the first reporting phase has already commenced, with a grace period allowing the use of default emission values until June 2024. Nevertheless, steel producers are urged to prepare for more rigorous emissions reporting in compliance with EU methodology to maintain competitiveness in the EU market. From 2026 onward, importers must procure CBAM certificates at prices reflecting the EU Emissions Trading System (ETS), further incentivizing accurate emissions declarations.

Non-EU Importers Held to Standard

CBAM’s inception is a strategic move to address carbon emissions by ensuring that non-EU manufacturers are held to similar GHG-reduction standards as those within the EU. It attempts to level the playing field between domestic and foreign producers and reinforces the EU’s commitment to becoming a carbon-neutral continent by 2050. This mechanism marks a shift from negotiated international environmental regulations towards the EU leveraging its market power to project its climate policies globally. As such, it signifies the maturing and globalization of carbon markets, requiring producers worldwide to adapt to these comprehensive standards.

Prepare Now for EU Methodology

Currently, importers can use the EU calculation methodology or emissions calculations accepted in countries of origin or default values listed by the European Commission to report embedded emissions. Based on CBAM reports received in January 2024, most importers used the last easiest option, i.e., default values. However, as mentioned previously, this type of reporting will no longer be accepted after June 2024.

After a transition period in 2025, the EU calculation methodology and its emissions factors will be required for CBAM reporting in 2026. This means that importers and producers should be already preparing for actual life cycle GHG emissions reporting following the EU methodology to remain competitive in the European market.

Additionally, importers in 2026 will be required to purchase CBAM certificates corresponding to the declared emissions. The price of CBAM certificates will be based on the weekly average price of the EU ETS allowance and expressed in EUR/tonne of CO₂ emitted. An independent accredited verifier will need to verify the declaration’s accuracy. Each year, by 31 May, starting in 2026, declarants will surrender CBAM certificates equivalent to their declared and verified embedded emissions. CBAM certificates will not be tradable, but they can be re-purchased by a regulator that issued them.

New importers of iron and steel can register at any time they decide to bring goods covered by CBAM to the EU market. Depending on when they become importers, they need to follow the rules applicable in this specific period. For example, until the end of 2025, they need to follow transitional rules; starting in 2026, they must follow full compliance rules.

Importers can claim emissions reductions if a carbon price was paid in the country of origin and deduct this price from the CBAM cost. Details on how the EU will incorporate foreign climate policies into CBAM calculations will be finalized before a definitive rule is entered into force. The European Commission claims that it will consider the position of its international partners. In the meantime, some countries are already deliberating how to accommodate CBAM. For example, China is contemplating including CBAM sectors in its own cap-and-trade scheme, and India is discussing a CO₂ tax.

As the CBAM enters into force, foreign companies must navigate the complexity of the system and its timeline to ensure compliance. Understanding these key requirements and the depth of the regulation is crucial for exporters looking to participate in the European markets.