Understanding and implementing CBAM – how companies can now meet the requirements of the Carbon Border Adjustment Mechanism

‍

In order to counteract the persistently high risk of carbon leakage to third countries due to higher European carbon prices, the European Commission has introduced a mechanism for adjusting CO2 limits – the Carbon Border Adjustment Mechanism (CBAM) – from 1 October 2023. Companies in the EU that import iron, steel,cement, aluminium, electricity, fertilisers or hydrogen in pure or processed form from non-EU countries will have to report all imports separately on a quarterly basis and make a compensation payment in the form of CBAM certificates. The price of the CBAM certificates is closely linked to the conditions of the European Emissions Trading Scheme (EU ETS) and is determined by comparison with the weekly average of the certificate prices in the EU ETS. The CBAM applies to direct emissions, i.e. greenhouse gases emitted from the production of goods until they are imported into the EU, but also to indirect emissions resulting from the generation of electricity for the production of goods covered by the scheme. If a CO2 price has already been paid in the country of origin, the cost can be offset against the CBAM certificate to avoid double taxation.

Accelerating decarbonisation and preventing carbon leakage

As a cornerstone of the European Green Deal, the ‘Fit for 55’ package sets ambitious targets to accelerate decarbonisation. At the heart of this effort is the gradual reduction of the total amount of emissions allowed under the European Emissions Trading Scheme (EU ETS). To achieve sustainable success in this area, the EU needs to prevent carbon leakage, i.e. EU and non-EU companies in certain emissions-intensive industries or sub-sectors relocating or importing from other countries with less stringent emission restrictions for cost reasons related to climate policy.

The Carbon Border Adjustment Mechanism (CBAM) is a crucial step in the fight against carbon-intensive imports and paves the way towards climate neutrality and, as a key element of the ‘Fit for 55’ package, aims to create a level playing field and price emission-intensive goods and products equally, regardless of whether they are produced inside or outside the European Union. This approach not only encourages EU industry to decarbonise, but also invites EU partner countries to step up their commitment to climate and environmental goals.

The countdown is on

CBAM officially becomes a reality on 1 October 2023. In a transitional phase from October 2023 to the end of 2025, no certificates need to be purchased yet, but EU companies will have to report on their imported CBAM goods and their direct and indirect emissions from 2024, starting in the fourth quarter of 2023. The first report must be submitted by 31 January 2024. Corrections can be made up to two months after the deadline. There is a longer deadline for the first two reports, with amendments possible until 31 July 2024, particularly for the first CBAM report, which is already due. In Germany, the German Emissions Trading Authority (DEHSt) within the Federal Environment Agency has been designated as the competent national authority by the end of 2023, through which importing companies within the EU will receive their access data to the EU CBAM portal, which will ultimately be used for reporting. Affected companies are requested to either use the manufacturer’s emission data or – if manufacturer’s data cannot (yet) be determined for the first three quarterly reports – to use the default values determined by the EU, the default values for the transitional period. In addition, import data relevant to the report must be collected. Many values are directly available in the import declarations of the imported goods, such as commodity code, net mass, process code, time of release and country of origin.

Implementing CBAM – digital, automated and compliant

Implementing CO2 border adjustment involves a significant amount of work for companies to collect and aggregate data, calculate emissions and prepare reports. Software that is tailored to the requirements of emissions trading, that largely automates the necessary processes and at the same time promises maximum legal certainty, promises to help.

The CBAM software from osapiens is closely aligned with the regulation’s catalogue of obligations and guides companies step by step, from the automated initial check of import declarations to the data-based calculation of emissions and the automated creation of the finished CBAM report.

Firstly,after a central upload, the software automatically checks all import declarations and assigns the goods they contain to specific product groups. It also automatically assigns import declarations to reporting periods and customs clearance dates to ensure that the legally required quarterly CBAM report is generated correctly. In addition, the solution offers a function for automated initial contact with suppliers and plant operators, the so-called “readiness check”. This can be used to determine whether they are currently able to provide accurate emissions data from the manufacturing process of CBAM goods, or whether they will have to use the default values provided for the transition period from Q3 2024 at the latest. This has the advantage of making suppliers aware of the challenges of CBAM and simplifying subsequent reporting processes.

In the next step, the software calculates the required CBAM certificates for both direct and indirect emissions based on the CBAM-relevant import declarations, after thoroughly checking the accuracy and reliability of the data provided for each type of goods (CN code). The final CBAM report can also be produced using the osapiens solution. Based on the data collected for this purpose, the total quantity of each type of goods produced and the associated CO2 emissions are broken down in detail. CO2 prices already paid in other production countries are also taken into account.

To ensure that the quarterly reports required by DEHSt can be produced on time, the software also offers a notification function that enables communication with internal interfaces. The CBAM report itself can be created in XML format, which greatly simplifies the export of all the necessary accompanying documents for submission to the EU.

To find out more about CBAM and what companies need to be aware of in terms of content and deadlines for the current reporting process, join our webinar on 14 February at 3pm. You can register using the following link: CBAM reporting obligation – are you prepared? (osapiens.com)

‍