EU Carbon Tax & Customs Obligations

The EU Carbon Border Adjustment Mechanism (CBAM) nicknamed Carbon Tax, is a set of new regulatory obligations with a new tax on certain goods at import in the EU.

In this article, we look at the intricacies of the EU Carbon Border Adjustment Mechanism (CBAM) before providing insights and tips to importers and exporters operating within the EU market.

The EU Carbon Tax in a nutshell

The Carbon Border Adjustment Mechanism (CBAM) will set a carbon price for certain imported goods. It will profoundly change the way certain products are imported in the EU: 

• For EU importers, it adds a new set of legal obligations, administration, reporting and tax. 
• For exporters to the EU, it introduces a requirement for the calculation of Greenhouse Gas (GHG) emissions, verification and certification. 

The change is admin-intensive so businesses operating in affected industries or trading in products subject to the CBAM should be already preparing. First, let’s look at the CBAM itself and then we’ll share some preparation insights.

Why is the EU introducing a Carbon Tax?

EU environmental rules apply to all companies manufacturing in the EU. To escape EU rules, it is therefore tempting, for some businesses, to relocate their production in counties with less stringent climate policies. Some companies may also prefer to import products from countries with less strict climate regulations instead of sourcing for local EU producers, subject to EU environmental regulations. This is called “Carbon Leakage”.

For the EU, these practices undermine the EU’s emission reduction efforts. They are also seen as an unfair competition to EU producers. To address “Carbon Leakage”, the EU has developed a carbon tax, the so-called Carbon Border Adjustment Mechanism (CBAM). The CBAM aims to establish a fair cost for the carbon emissions produced abroad during the manufacturing of carbon-intensive goods imported into the EU. The Carbon Tax also aims to encourage cleaner industrial production in non-EU countries.

By ensuring that imported goods have paid a price for their embedded carbon emissions via the Carbon Tax, the CBAM guarantees that imported and domestically produced products have a similar carbon price.

CARBON ADJUSTEMENT MECHANISM (CBAM)GOODS

What are the products subject to the CBAM?

The Carbon Border Adjustment Mechanism (CBAM) will initially focus on specific goods with carbon-intensive production processes as well as high-risk of “Carbon Leakage”. The full list of “CBAM goods” is to be found in Annex I (see hereafter) of the regulation and the main categories are as follows: 

The extension of the CBAM to additional products such as chemicals and polymers is to be discussed throughout 2025.

An extension to polymers and organic chemicals would affect the Oil & Gas sector as CBAM would therefore apply to goods such as: high density polyethylene, low density polyethylene, normal alpha olefins, hexen, methanol, ethylene, ethylene dichloride, vinyl chloride monomer and other oil & gas downstream products.

As the CBAM is gradually implemented, it is expected to cover more than 50% of emissions in sectors covered by the EU Emissions Trading System (ETS) with a full inclusion of all ETS products planned for 2030. This will therefore include oil & gas products such as: crude petroleum and petroleum products, inorganic basic chemicals, industrial gases, synthetic rubber, non-ferrous metals. 

How are “CBAM Goods” identified?

Products subject to the CBAM regulation are identified using Commodity Codes. The classification is based of the imported goods using the EU’s Combined Nomenclature. Accurate classification is therefore critical to ensure that products subject to the regulation are identified as “CBAM goods” and treated accordingly. 

IMPORT FORMALITIES AND CUSTOMS OBLIGATIONS

What is the link between the CBAM and the Union Customs Code (UCC)?

The Union Customs code applies to the import of CBAM products as follows:

• Identification of products as per the Classification rules in the UCC.
• Non-Preferential Origin as provided for in the UCC
• The ’customs declarant’ is the declarant lodging a customs declaration for release for free circulation of goods in its own name or the person in whose name such a declaration is lodged as referred to in the UCC. 
• The Customs treatment of the goods are based on the UCC Customs procedures (Free Circulation, Inward Processing, Outward Processing, Returned Goods).
• The definition of ’importation’ means the release for free circulation as provided for in the Union Customs Code. Goods entered under the Customs Warehousing procedure will therefore not be “imported” until removed from this procedure.
• The definition of ’importer’ means either the person lodging a customs declaration for release for free circulation of goods in its own name and on its own behalf or, where the customs declaration is lodged by an indirect customs representative the person on whose behalf such a declaration is lodged as per the Union Customs Code.

Supply chain disruptions may therefore occur because of incorrect or non-compliant Customs information at import.

How is origin determined for the CBAM?

Imported goods are to be considered as originating in third countries in accordance with the rules for non-preferential origin as referred to in the Union Customs Code.

What kind of import transactions are affected by the CBAM?

The Regulation applies CBAM goods originating in a third country (non EU/EFTA goods): 

• Imported into the customs territory of the Union.
• Brought to an artificial island, a fixed or floating structure, or any other structure on the continental shelf or in the exclusive economic zone of a Member State that is adjacent to the customs territory of the Union.

What Customs Procedures are affected by the CBAM?

The Regulation applies CBAM goods originating in a third country (non EU/EFTA goods) under the procedures of:

• Free circulation
• Inward Processing Relief (IPR)
• Outward Processing Relief (OPR)
• Returned goods

CBAM FORMALITIES

How will the CBAM work in practice?

The CBAM is based on the purchase of certificates by importer.  

• To import CBAM products, purchase CBAM certificates and submit CBAM declarations, traders (or their representative) must be authorised. Only an ‘Authorised CBAM Declarant” can import CBAM goods. EU Importers must register to be an “Authorised CBAM Declarant” with national authorities of an EU country. The CBAM declarant must be an EU entity. Businesses can register individually or through a representative. 
• National authorities will authorise registration of declarants in the CBAM system.
• EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. The number of CBAM certificates held must be equal to the total emissions embedded in the CBAM goods imported.
• The price of the certificates will be calculated depending on the weekly average auction price of EU ETS (Emissions Trading System) allowances expressed in € / tonne of CO2 emitted. 
• Importers must declare by 31 May each year the quantity of goods and the embedded emissions in those goods imported into the EU in the preceding calendar year. They must also surrender the CBAM certificates they have purchased in advance from the national authorities where they are registered.
• National authorities will review and verify declarations.

If a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

How to apply to be an “Authorised CBAM Declarant”?

Traders will need to make an application in a EU Member State with the following information:

• Name, address and contact information; 
• EORI number; 
• Main economic activity carried out in the Union; 
• Certification by the tax authority in the Member State where the applicant is established that the applicant is not subject to an outstanding recovery order for national tax debts; 
• Declaration of honour that the applicant was not involved in any serious infringements or repeated infringements of customs legislation, taxation rules or market abuse rules during the five years preceding the year of the application, including that it has no record of serious criminal offences relating to its economic activity; 
• Information necessary to demonstrate the applicant’s financial and operational capacity to fulfil its obligations under this Regulation and, if decided by the competent authority on the basis of a risk assessment, supporting documents confirming that information, such as the profit and loss account and the balance sheet for up to the last three financial years for which the accounts were closed; 
• Estimated monetary value and volume of imports of goods into the customs territory of the Union by type of goods, for the calendar year during which the application is submitted, and for the following calendar year; 
• Names and contact information of the persons on behalf of whom the applicant is acting, if applicable. 

What information does the annual CBAM declaration must contain?

The CBAM declaration shall contain the following information: 

• The total quantity of each type of goods imported during the preceding calendar year, expressed in megawatt-hours for electricity and in tonnes for other goods; 
• The total embedded emissions in the goods referred to in point (a) of this paragraph, expressed in tonnes of CO2e emissions per megawatt-hour of electricity or, for other goods, in tonnes of CO2e emissions per tonne of each type of goods, calculated and verified the total number of CBAM certificates to be surrendered, corresponding to the total embedded emissions after the reduction that is due on the account of the carbon price paid in a country of origin and the adjustment necessary to reflect the extent to which EU ETS allowances are allocated free of charge in accordance; 
• Copies of verification reports, issued by accredited verifiers.

Reporting for Inward Processing products

There is a special reporting for processed products resulting from Inward Processing Procedure.

The authorised CBAM declarant must report the emissions embedded in the goods that were placed under the inward processing procedure and resulted in the imported processed products. This applies even where the processed products are not CBAM goods listed in Annex I to the regulation. The reporting also applies where the processed products resulting from the inward processing procedure are Returned Goods.

Reporting for Outward Processing

If the imported products are CBAM goods listed in Annex I resulting from an outward processing procedure, only the emissions of the processing operation undertaken outside the customs territory of the Union are to be reported.

Reporting for Returned Goods

Where the imported goods are returned goods, the authorised CBAM declarant shall report separately, in the CBAM declaration, ‘zero’ for the total embedded emissions corresponding to those goods. 

APPLICATION AND TRANSITION PERIOD

When is the CBAM regulation applicable?

The regulation will be implemented in 2 phases:

• Transitional period from 1 October 2023 to 31 December 2025
• Full application scheduled for 1st January 2026.

What does “transition phase” means?

The CBAM’s transitional phase will commence on October 1, 2023. The objective of this transition period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.

What are the requirements during the transition phase?

From 1 October 2023, a reporting system will be introduced. Importers of CBAM goods will have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions). Indirect emissions will apply to certain products only after the transitional period (cement and fertilisers), on the basis of a methodology still to be defined.

There is no requirement for financial payments or adjustments during the transition period.

There are special arrangements for the reporting of IPR, OPR and Returned Goods during the transition period.

What will happen after the transition period?

On 1 January 2026 the full regulation applies. From that date, importers will need to:

• declare each year the quantity of goods imported into the EU in the preceding year and their embedded emissions. 
• surrender the corresponding number of CBAM certificates.
• Make a financial payment or adjustment.

IMPACT OF CBAM ON IMPORTERS AND EXPORTERS

Impact for EU companies importing CBAM Goods into the EU

For EU importers, we can foresee a few impacts of the CBAM:

• New set of legal and compliance obligations for importers. 
• New authorisations and requirements for import declarations.
• New annual reporting of emissions for importers and import procedures.
• Increased import (direct and indirect) costs: new tax resulting in higher import prices of products subjected to the CBAM for instance steel or aluminium.
• Increased prices of secondary products including CBAM goods. For instance EU parts or products containing imported higher-priced CBAM goods such as steel or aluminium subject to the Carbon Tax.
• Improved competitive position for EU manufacturers against foreign imports. Possibility to gain EU market shares from non-EU manufacturers.

Impact for non-EU companies exporting CBAM goods to the EU

For non-EU companies the impact is expected to be:

• Increased costs due to new cost accounting and administration requirements. Implementation of an internal carbon accounting mechanism to track the embedded emissions associated with these products. This is product-specific so each products that will be exported to the EU must be tracked separately. Implementation of the Carbon Tax.
• Financial impact of costs increases and possible loss of market shares.
• Additional formalities with the obtention of an independent verification of embedded emissions. 
• New document management with a declaration of embedded emissions at import to proceed with the import formalities.
• New competition from EU based manufacturers that can offer a simple, admin-free delivery of  locally sourced similar products. New competition if your products are more carbon-intensive than the industry average.
• New products being added to the list of CBAM goods. Extension of the list can eventually cover “white goods”.
• Competitive advantage if your products are less carbon-intensive than the competition and are “greener” than the industry average.

BUSINESS PREPARATION FOR THE CBAM

First, does CBAM apply to your products and transactions?

Review the global supply chain to determine whether you import products that are in scope:

• Do you import products listed in Annex I of the CBAM regulation? Are your confident your classification is accurate?
• Do you import these products from outside the EU/EFTA? Are you confident the non-preferential Rules of Origin are accurately applied?

It the CBAM applies to your products…

Registration

• In which country will you register? Do you need several registrations in EU Member States?
• Which entity do you need to register?
• Does the legal status of the entity permit it to be an Authorised CBAM Declarant?
• Do you need or want to use a representation?
•  How long does the registration take in the country where you are going to register?

Data collection

• Do you already have data on actual emissions or do you have to start from scratch? Can you use the standard (default) values? 
• Are your suppliers already collecting emissions data? Are your supplier ready to apply the CBAM requirements?
• Can your suppliers provide verification reports for the CBAM goods supplied to you? 
• How are your going to calculate embedded emissions? 

Reporting

• Can your ERP systems implement CBAM administration? Can you use an alternative?
• Can your system produces reports with CBAM required data? 
• Can you use your ERP system for yearly declarations and the verification of embedded emissions? 

Payment and adjustment

• How much Carbon tax are you expecting to pay from 2026? What will be the financial impact of the Carbon Tax on your business?
• Do you import CBAM products from a third country where a carbon pricing system is in place? Carbon prices paid outside of the EU on imported goods may be credited.

Carbon Tax and Supply chain management

• Can you work with your suppliers to reduce carbon emissions? Should a supplier support program be developed to help suppliers provide product-level emissions data? 
• Does the supply chain needs restructuring? 
• Do you need to review your current supplier base?

Reference

REGULATION (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism

The CBAM is a game-changer for EU importers and exporters to the EU, should you wish to discuss your EU imports and the impact of the Carbon Tax, do get in touch info@alegrant.com.