Carbon Border Adjustment Mechanism (CBAM): What Companies Need to Know

The Carbon Border Adjustment Mechanism (CBAM), which supports the European Union's climate goals, is presenting new opportunities and challenges for companies. In the following sections, we’ll explore how CBAM operates, its impacts on companies in Turkey, and the necessary steps for compliance.

What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory system adopted by the European Union (EU) as part of the EU's commitment to combat climate change and achieve climate neutrality by 2050.

As a part of the EU's Fit for 55 package, CBAM came into effect in October 2023, complementing the EU's existing Emissions Trading System (ETS), which was established in 2005. CBAM provides a comprehensive framework aimed at reducing greenhouse gas emissions and preventing carbon leakage.

What is carbon leakage?

Carbon leakage occurs when companies relocate their operations or parts of their activities from countries with strict carbon emission regulations to countries with more lenient climate policies. This move allows them to gain an unfair competitive advantage by avoiding strict climate policies, undermining global emission reduction efforts, distorting competition, and weakening sustainability goals.

How does CBAM prevent carbon leakage?

CBAM ensures that imported goods are subject to a carbon price equivalent to that applied to domestic production within the EU. This mechanism reduces the risk of carbon leakage arising from increasing carbon costs under the EU ETS, protecting the competitiveness of European industries. Additionally, it promotes sustainable practices to reduce the global carbon footprint and encourages the establishment of similar systems in other countries.

CBAM Implementation Timeline: Where Are We Now?

Launched as the Carbon Border Adjustment Mechanism (CBAM), CBAM began with a transitional phase on October 1, 2023. It consists of two main phases: the Transition Period and the Full Implementation Period. We are currently in the Transition Period, where CBAM declarants are only required to gather and report information regarding greenhouse gas (GHG) emissions embedded in goods imported into the EU. So, what has occurred in this phase, and what does the future hold?

Transition Period (October 1, 2023 - December 31, 2025)

Reporting and Data Collection:

2023: Legislation was completed, and CBAM was activated.
2025: The first review and expansion to other ETS sectors are scheduled.

Full Implementation Period (January 1, 2026 – 2034)

Costs and Certificates:

2026-2034: CBAM financial obligations will be implemented gradually, with the phase-out of free allocations under the EU ETS.
Post-2034: The full cost will be calculated based on the carbon content of products.

Which Sectors Are Covered in the Transition Period?

Currently, CBAM applies to six sectors: cement, electricity, fertilizers, iron and steel, aluminum, and hydrogen. These sectors are considered carbon-intensive in terms of greenhouse gas emissions, carbon leakage risk, and practical implementation.

Are There Exemptions?

CBAM does not apply to imports from countries within the EU Emissions Trading System (ETS) or from countries with fully linked local ETS. Additionally, shipments valued under 150 euros and goods used in military activities are exempt from this regulation.

How Does CBAM Work?

This mechanism aims to ensure that importers pay for the embedded emissions in the products they import by calculating these emissions' costs. CBAM helps align international trade with climate policies while protecting the internal market.

CBAM Pricing Principles

CBAM’s pricing principles outline the tools and processes importers will use to cover the cost of emissions. Let’s examine this mechanism under three main headings:

CBAM Certificates

CBAM certificates are tools that importers will use to calculate the cost of embedded emissions in imported products. Starting January 1, 2026, importers or indirect customs representatives will be required to purchase and submit CBAM certificates for the embedded emissions in imported goods. Certificates can be acquired throughout the year rather than at the time of import.

Price of Certificates

The price of a certificate will reflect the previous week's average EU ETS auction price, expressed in euros per ton of CO2 emissions. CBAM certificates are the tool importers will use to pay for the embedded emissions in goods imported into the EU.

Carbon Price in Third Countries

No importer will be charged twice for the same emissions. Importers will have the opportunity to request a reduction in CBAM certificates based on the carbon price level paid in the country of production. However, importers must demonstrate that an effective carbon price has been paid for the embedded emissions in the country of origin.

Which Sectors and Products Are Covered by CBAM?

The initial sectors targeted by CBAM were chosen based on significant greenhouse gas emissions, trade intensity, and carbon leakage risks. The EU aims to include these sectors in CBAM to encourage cleaner production methods both inside and outside the EU while protecting the competitiveness of EU businesses in the global market. These sectors, mentioned below, are covered in the transition period.

Cement: This sector covers the production of cement, a key construction material.
Electricity: Electricity production is vital for various industries and daily life.
Fertilizers: Fertilizers are essential for agriculture and help boost crop yields. Fertilizer production involves energy-intensive processes.
Iron and Steel: The iron and steel sector includes the production of various types of steel used in construction, manufacturing, and infrastructure projects.
Aluminum: Aluminum production involves energy-intensive processes such as smelting, refining, and shaping.
Hydrogen: The hydrogen sector focuses on the production of hydrogen used as an energy carrier and fuel source in various industries.

The Annex-1 of CBAM Regulation (EU) 2023/956 lists the products for which embedded emissions must be tracked and reported. If an exported product does not fall under the HS/CN codes in Annex-1, there is no need to report on these inputs.

How Does CBAM Impact Turkey and Turkish Companies?

CBAM has a significant impact on Turkey's trade with the EU, as Turkey is a major supplier of CBAM-covered products to the EU. According to data from Turkey’s Ministry of Trade, Turkey is the EU’s largest supplier of cement, second for iron and steel, and third for aluminum. CBAM products account for 42% of Turkey's total exports to the EU, accelerating Turkey's green transformation. However, companies may risk losing both customers and investors if they fail to comply with CBAM, as the mechanism mandates companies to reduce their carbon emissions.

What is CBAM’s Scope of Greenhouse Gases?

Direct Emissions: Direct emissions refer to greenhouse gas emissions released during production at the facility level, representing emissions directly controlled by an organization. These emissions may result from fuel combustion and the calcination process.

Indirect Emissions: Indirect emissions originate from activities within an organization but are not directly under its control. Emissions generated by electricity used in production processes are considered indirect emissions.

Embedded Emissions: Embedded emissions are the total greenhouse gas emissions released throughout a product’s lifecycle, encompassing both direct emissions during production and indirect emissions from the use of electric energy.

Responsibilities and Steps cCompanies Should Take Regarding CBAM

CBAM imposes various responsibilities and obligations on companies. Understanding these regulations begins with companies assessing their standing under CBAM. Questions around who is required to report, who needs to provide data, and who bears financial responsibility adds to the complexity. At this point, companies should ask themselves:

Am I an importer to the EU or an exporter to the EU?

If you are an importer:

Becoming an CBAM Declarant

In order to import, the company must become an CBAM declarant by December 31, 2024.
An emissions report must be submitted by the authorized declarant by May 31 of each year.
Without obtaining authorization, the importation of products will not be possible.

Collecting Data and Reporting

Detailed information on the emissions of imported goods should be collected and reported for each quarter of the calendar year.

If you are an exporter:

Collecting and Sharing Data

Exporters must share the relevant emissions data with their importers, who will need it for their reports.
Exporters must gather this information from their importers and include it in the emission report when exporting products to the EU.

Being Aware of Risks

Exporters to the EU must take action regarding emissions data to avoid losing customers in the EU.

In conclusion, both importers and exporters are required to manage emission data accurately and regularly. By fulfilling these responsibilities, they can maintain a competitive advantage in the EU market.

How Should You Comply with CBAM? A Roadmap for Your Company

Preparation: Take the time to understand the impact of CBAM on your sector and supply chain. Manage your emissions with accurate calculations and verifiable reporting. Establish clear and effective communication with your stakeholders regarding your emission data.

Learning: The European Commission is developing IT tools and educational materials to help businesses meet their reporting obligations. You can either use these resources or collaborate with firms specializing in CBAM to improve your processes.

Reporting: In the first year of implementation, importers can choose one of three reporting options: full reporting based on the new methodology, reporting based on equivalent third-country systems, or reporting based on reference values. What’s important is ensuring your data is reported correctly and verifiably.

Financial Risks and Opportunities of CBAM

Financial Risks

Increased Costs: CBAM can create additional costs for suppliers outside the EU, negatively affecting their competitiveness.

Compliance Difficulty: Companies that import may need to update their existing systems to comply with CBAM, leading to extra costs and complexities.

Market Fluctuations: The fluctuation of carbon prices could complicate cost forecasting and create financial uncertainty.

Investor Confidence: The uncertainty brought by new regulations could undermine investor confidence and impact long-term investments.

Financial Opportunities

Sustainability Innovation: CBAM may encourage companies to invest in more sustainable production methods, creating opportunities for the development of innovative technologies.

Competitive Advantage: Companies compliant with CBAM, reducing their carbon footprint and adopting more sustainable practices, may gain a competitive advantage, especially with the growing demand for eco-friendly products.

New Markets: The increasing demand for sustainable products could lead to new markets. Companies can target these emerging markets for growth opportunities.

Attracting Investments: Investments focused on sustainability may become more attractive to investors. Companies can develop strategies to meet sustainability targets and secure financial support.

The impact of CBAM will vary depending on how companies transform their environmental strategies and business models. For more detailed information and resources, visit the EU's official website: European Commission - CBAM.

Streamline and Accelerate Your CBAM Processes with 3pmetrics

We answer two main questions regarding how we support companies in CBAM processes:

What does 3pmetrics’ software provide in managing your CBAM process?

We automate and speed up your data collection and reporting processes, eliminating error risks and completing months-long reporting tasks in just hours.

How do we support your CBAM process at 3pmetrics?

We accurately and securely calculate your carbon footprint for CBAM reporting. Using the GHG Protocol methodology and CBAM framework, we calculate emissions from your suppliers, enabling you to identify critical points in your supply chain. This way, you can reduce your carbon footprint and take quick and effective steps to decarbonize your supply chain.

To learn more and optimize your CBAM processes, contact us.

Frequently Asked Questions

What’s the difference between CBAM and EU ETS?

CBAM (Carbon Border Adjustment Mechanism) applies to the carbon emissions embedded in specific imported goods, while EU ETS (European Union Emissions Trading System) manages the emissions trading within certain industrial sectors. CBAM addresses international trade, while EU ETS manages emissions within the internal market.

Which emissions will be reported under CBAM, and which processes should be followed in reporting?

The declarant (importer or indirect customs representative) will report the embedded emissions of imported CBAM goods at the end of each quarter. If the importer purchases goods from multiple suppliers, they must gather emission data from these suppliers. Exporters should provide the requested emission data to their importers and collect the same information from their importers. During the transition period, all direct and indirect emissions of products must be tracked.

Which sectors and products are covered by CBAM?

CBAM currently applies to six sectors:

Cement
Electricity
Fertilizers
Iron and Steel
Aluminium
Hydrogen

These sectors must meet certain requirements to comply with CBAM's emission targets. CBAM covers products listed under specific Harmonized System (HS) codes related to the sectors mentioned above.

Which sectors will be added to CBAM, and what steps must these sectors take to comply?

The first review in 2025 will likely expand CBAM’s coverage to include additional sectors under the Emissions Trading Systems (ETS). This could create challenges for high-energy-consuming sectors such as the chemical industry and others.

Who is responsible for CBAM reporting and what obligations do companies without direct responsibility have?

The following entities are responsible for CBAM (Carbon Border Adjustment Mechanism) reporting:

EU-Based Importers: All companies importing under CBAM are responsible for fulfilling their reporting obligations.
Indirect Customs Representatives: If the importer is not based in the EU, the indirect customs representative assumes the reporting responsibility.

However, companies without direct responsibility in CBAM reporting also have certain obligations. These companies must provide the necessary data for CBAM reports and share this information with the companies from which they procure their goods.

What phases will we go through during the CBAM transition period, and how will this process impact businesses?

We are currently in the transition period for CBAM (Carbon Border Adjustment Mechanism). The main implementation phase will begin in 2026 when CBAM fully comes into effect. During this process, between 2026 and 2034, the financial obligations of CBAM will be implemented gradually, and free allocations under the EU ETS (European Union Emissions Trading System) will end. This will require businesses to take on more responsibility in reducing their emissions.