On October 1, 2023, the European Union (EU) launched the transitional phase of its Carbon Border Adjustment Mechanism (CBAM), a groundbreaking carbon tariff initiative scheduled for full implementation by 2026. CBAM aims to assign a fair cost to the carbon emissions involved in producing carbon-intensive goods imported into the EU, thereby incentivizing cleaner industrial practices in non-EU nations.
Aligned with the EU Emission Trading System (EU ETS), the first international trading platform for greenhouse gas emissions, CBAM is expected to influence global markets while furthering the EU’s goal of reducing its carbon footprint.
Tackling Carbon Leakage: A Global Challenge
While the EU ETS has been successfully reducing emissions within the EU since it’s launching in 2005, CBAM is designed to address the broader issue of climate change on a global scale. The EU cannot directly regulate emissions in other countries, which has led to “carbon leakage”—a phenomenon where companies relocate production to countries with less stringent regulations, increasing global carbon emissions.
CBAM seeks to counteract this by imposing a carbon price on imported goods such as cement, iron, steel, aluminum, fertilizers, hydrogen, and electricity.
Concerns from Trade Partners
While CBAM is said to “level the playing field” between the EU’s carbon policy and the rest of the world, some trade partners have voiced concerns about the policy. Perhaps the most notable example comes from the World Trade Organization (WTO) which has expressed concern that CBAM may hinder fair trade, especially as European companies have had years to adjust to gradually increasing carbon costs and phasing out free allowances, whereas CBAM imposes stricter timelines on imports in a much shorter amount of time. The primary concern is that this could inadvertently erect trade barriers between nations.
To mediate these concerns and achieve global climate goals, some partners have suggested that the EU may need to extend support to developing countries that lack the infrastructure to adopt carbon-neutral practices. Some have proposed using CBAM revenue to assist these nations in transitioning toward greener practices. This approach could help bridge the gap between Western nations and developing countries while promoting global collaboration on climate policy.
Impact on Industrialized Economies
CBAM’s effects will likely be most pronounced in major economies like China, Turkey, Russia, the United Kingdom, and the United States. While these nations have the resources to implement their own carbon reduction initiatives, such as the U.S. Inflation Reduction Act, CBAM could still pose economic challenges. Emerging economies, including India, Vietnam, and Brazil, may require additional assistance to meet the emissions benchmarks set by the EU.
CBAM has also spurred international discussions on trade and climate policies. Notably, the WTO has suggested exploring a global carbon pricing system with regional variations, allowing for lower carbon prices in developing nations. It remains to be seen what, if any, changes the EU will implement to mediate these concerns. For now, importers should continue to prepare for compliance as we enter the final year of CBAM’s transitional phase in 2025.
Next Step for Importers
Beginning on January 1, 2026, only registered declarants may import CBAM goods. As CBAM progresses, businesses will need to calculate both direct and indirect emissions, verifying this data through certified testing centers. They will also be required to purchase CBAM certificates from designated authorities and file annual declarations by May 31 annually.
Accurate carbon reporting will be critical for all businesses, regardless of location. EU importers must disclose the carbon footprint of their imports, necessitating reliable and precise reporting from their suppliers. Learn more about navigating the carbon border adjustment mechanism as a non-EU importer.
Get Support
Navigating the complexities of any new regulatory requirement can feel overwhelming, but you don’t have to face it alone. Our experts have closely followed the Carbon Border Adjustment Mechanism’s evolution and bring years of experience in EU reporting requirements. Whether you’re unsure where to begin, need help understanding the rules, or require support with compliance, we’re here to guide you every step of the way. Contact Tetra Tech today at [email protected] and visit our CBAM Support Page for additional resources.
