5 steps to help prepare for CBAM

Christopher McClure, Rebecca Miller
5 steps to help prepare for CBAM

The deadline for CBAM is rapidly approaching – and companies need to understand their obligations. Our ESG team highlights five steps to help prepare.

What is CBAM?

As the European Union (EU) works to meet its greenhouse gas emissions reduction targets under the Paris Agreement, an emerging risk is that some companies might move carbon-intensive production abroad, which could lead to carbon leakage.

The EU’s new Carbon Border Adjustment Mechanism (CBAM) seeks to prevent that leakage by mandating companies to pay for the embedded carbon emissions generated during the production of certain goods imported into the EU. Basically, CBAM applies the carbon costs charged for EU-produced products to imported products as well. This requirement would discourage companies from moving their production to a country where carbon emissions costs are lower or nonexistent.

The transitional phase for CBAM started on Oct. 1, 2023. The first reporting phase for importers covers the fourth quarter of 2023, with submissions due on Jan. 31, 2024. During this transitional phase, CBAM will apply to key carbon-intensive goods (iron, steel, cement, aluminum, fertilizers, electricity, and hydrogen), including certain precursors and a limited number of downstream products.

The transitional phase, which runs through the end of 2025, will serve as a pilot period for all stakeholders to implement key takeaways before the definitive period starts in 2026. Following the transitional phase, additional products will be determined to be in scope with a goal of all EU Emissions Trading System (ETS) goods to be included by 2030.

After 2026, importers must purchase CBAM certificates and surrender the appropriate number of them to cover the corresponding emissions of imported CBAM products each year. The European Commission will determine the price of CBAM certificates, which will be tied to the price of ETS auctions. During the transitional phase, importers of CBAM goods will be required to submit quarterly reports but will not yet be required to purchase CBAM certificates.

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5 steps companies should take to comply with CBAM

Importers of CBAM products must submit reports each quarter that outline the following:

  • The quantity of CBAM goods imported during the quarter
  • The embedded emissions of those imports
  • The total indirect emissions
  • Any carbon price already paid in the country of origin

To meet these obligations, companies should take these steps now.

1. Determine obligations under CBAM

Annex I of the CBAM regulation lists the specific Combined Nomenclature (CN) codes covered by the regulation. To determine if they have reporting obligations, companies should review the products imported into the EU and compare them to the list of CN codes in Annex I. Even if companies do not have direct reporting obligations under CBAM, they might sell products to customers who do have obligations to determine the embedded carbon in their products, and those customers might need assistance.

2. Perform an impact assessment

If companies have obligations under CBAM, they will need to determine the volume of CBAM products covered, the country of origin of those products, and the production sites.

3. Develop the right cross-functional team

Next, it is important to have the right team working to help meet obligations. Such a team might include trade compliance; accounting; legal; environmental, social, and governance (ESG); and other specialists. Additionally, large multinational enterprises will need input from members of their global team. The right team is critical to establishing the appropriate oversight and management of the compliance process.

4. Calculate embedded emissions

Until Dec. 31, 2024, companies can use default values of embedded emissions published by the EU with an explanation of why actual data is not being used. Companies will need to quickly work to collect the direct and indirect embedded emissions within their CBAM products to be able to report actual emissions once default values are no longer permitted. Obtaining this data can be very challenging, so companies need to determine how they can efficiently work with their suppliers. Starting the process now by providing education and support on data needs and expectations can avoid issues later.

5. Get ready to report

Companies must establish the right internal systems and controls to gather, verify, and report CBAM information quarterly. The reports are to be submitted through the CBAM Trader Portal under the CBAM Transitional Registry. A data collection template was developed on behalf of the commissions to facilitate the communication of this data. The first version of the template was published on Aug. 21, 2023.

Find even more ESG-related information in our ESG resource center.

This landmark legislation creates financial incentives for non-EU producers to reduce their emissions. Given the complexity, it’s important for companies to understand how CBAM could affect their organizations now and to develop the systems and controls to obtain and report accurate data.

Contact our ESG team

See how our integrated ESG team can help your business understand its CBAM obligations.
Chris McClure - social
Christopher McClure
Partner, ESG Services Leader
Rebecca Miller
Rebecca Miller