“Unravelling the EU’s Green Policy Game-changer: The Carbon Border Adjustment Mechanism (CBAM)”

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Author : Pieter de Villiers

Board Member & Communication portfolio : SAEEC

Exploring CBAM Fundamentals

Navigating change can be challenging and the Carbon Border Adjustment Mechanism (CBAM) is a perfect example. Proactively initiated by the European Union (EU), the aim of this ground-breaking mechanism is to level the playing field for EU industries against nations practicing less rigorous climate policies. This strategy includes a levy on imports of certain goods, predominantly those from sectors highly subject to carbon leakage within the EU.

Commencing from 1st October 2023 and concluding by 31st December 2025, organisations importing goods into the EU will have to declare quarterly volumes of their imported products and the embedded emissions within each product.. Starting from 1st January 2026, relevant firms will be mandated to purchase an equivalent number of CBAM certificates to these embedded emissions. The cost will be eased in and increased over time.

Affected Products and Sectors: CBAM’s Target

The sectors that are a part of the CBAM plan are significant contributors to carbon emissions— cement, fertilizers, iron and steel, aluminum, electricity, and hydrogen. However, the coverage umbrella of the CBAM is set to extend to carbon-intensive items as per the EU Emissions Trading System. This will be based on the final legislation instituted by the European Parliament and the Council of the European Union.

The CBAM Mechanics

At its heart, the Carbon Border Adjustment Mechanism (CBAM) functions as a carbon emissions tariff on imported goods, designed to foster environmentally sustainable industries across the European Union. Essentially, it seeks to translate emissions costs into tangible financial obligations, thereby providing an incentive for importers and their suppliers to adopt greener production methods.

When it comes to the mechanics, the CBAM process is akin to having importers buy and essentially ‘surrender’ CBAM certificates. These certificates represent the emissions linked to the production of imported goods, specifically the emissions generated across sourcing, production, and transportation stages. The number of certificates required correlates to the ’emissions intensity’ of the goods, and their cost is anchored to the prices prevailing in the EU Emissions Trading System (ETS).

Delving deeper, the CBAM mechanism entails a sequence of well-defined steps.

Carbon Cost Calculation: Initially, importers must estimate the carbon emissions tied to their products. Termed as ’embedded emissions,’ these are typically the indirect emissions spawned during the production process. Factoring in various elements such as raw material procurement, energy usage in manufacturing, and supply chain logistics, a comprehensive carbon cost emerges for each product.
CBAM Certificate Acquisition: Post the calculation of the carbon cost, importers are obligated to purchase CBAM certificates. Each certificate is representative of a tonne of CO2 emissions, with the pricing tethered to the EU’s Emissions Trading System (ETS).
Submission of Emissions Reports: A crucial part of the CBAM mechanism is the submission of yearly reports by importers. These reports provide a clear picture of the carbon emissions linked with their imported goods. Notably, they must surrender an equivalent number of CBAM certificates corresponding to their reported emissions.
Verification Process: To ensure full compliance with the CBAM rules, all importers’ reports undergo a verification check by an independent authority. This procedure ensures a fair and equitable acknowledgment of emissions and their corresponding certificates from every importer. Upsurges in the required number of certificates are adjusted correspondingly in case of discrepancies.
Refund Applications: There’s an allowance for importers to apply for a refund if the actual carbon content in the goods is found to be less than initially reported, providing a further incentive for accuracy in emissions reporting.

This robust mechanism is intended to level the competitive field for EU producers who are already shouldering costs under the EU ETS and fulfilling their climate commitments. By channelling non-EU importers to shoulder similar responsibilities, the CBAM fosters a motivated drive towards carbon emissions reduction on a global scale.

What Should Affected South African Companies Be Doing?

In light of these changes, there are some steps companies impacted by CBAM can take:

Carbon Footprint Assessment: Companies must understand and calculate their carbon footprints. This includes “embedded” or “indirect” emissions from the production of goods.

Regulatory Compliance: Understanding the intricacies of the CBAM scheme, including the calculation and reporting of emissions, is crucial for compliance.

Emission Reduction: As the CBAM aims to incentivize lower-carbon operations, businesses should explore and invest in technologies and practices to reduce their carbon emissions.

Strategic Planning: Companies need to consider the financial impact of the CBAM on their operations and make the appropriate strategic adjustments. This could involve passing costs onto consumers, investing in greener practices, or looking for alternative markets.

Public Policy Engagement: Businesses can engage in public policy dialogue to help shape CBAM’s implementation regulations to ensure they are workable and fair.

We’re here to support businesses in understanding and navigating through these dynamic changes. Stay connected with us for more updates on CBAM and other green policy initiatives globally.

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