Are you in the cement, iron and steel, aluminum, fertilizer, or hydrogen industries? Are products from your facilities imported into the European Union, either directly or after downstream use by a customer? If so, you may be subject to reporting embedded emissions under a new regulation starting January 31st, 2024.
In May 2023, the European Parliament and the Council, through the European Commission (the Commission), published and implemented a new regulation establishing the Carbon Border Adjustment Mechanism (CBAM). The CBAM seeks to prevent carbon leakage and incentivize the reduction of emissions by operators in third countries by complementing the European Union Emissions Trading System (EU ETS) and applying an equivalent set of rules to imports into the customs territory of the EU.
Under the CBAM Regulation, only an authorized CBAM declarant can import goods into the customs territory of the EU. These CBAM goods are specific goods from the cement, iron and steel, aluminum, fertilizer, and hydrogen industries, and electricity. Annex I of the CBAM Regulation lists out the Combined Nomenclature (CN) codes (i.e. EU customs codes) for goods that are subject to the CBAM.
Entities affected by the CBAM requirements may fall under one of three definitions:
- Importers receive CBAM goods from various installations, possibly from different countries outside the EU. Importers can be 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. Importers are considered the authorized CBAM declarant and carry the reporting responsibility.
- Operators are any person who operates or controls an installation in a third (i.e. non-EU) country. Operators are responsible for providing embedded emissions data to Importers, as requested.
- Suppliers to Operators are any person whose products may serve as precursor for CBAM goods produced by an Operator. Suppliers to Operators are responsible for providing embedded emissions data to Operators, as requested.
Requirements under the CBAM Regulation include registration for CBAM declarants and operators, calculation and reporting of embedded emissions of CBAM goods, reporting of carbon pricing data, establishment of monitoring methodology documentation, and the eventual purchase of CBAM certificates. Embedded emissions to be reported may include direct, indirect, and specified precursors with specific requirements prescribed by industry and CN code. Reporting periods for CBAM declarants are quarterly, starting with initial reports due January 31st, 2024 for Q4 2023. There will be a transitional period with more leniency in calculation and monitoring methodology through the end of 2025. Further, the initial two quarterly reports may be revised through July 31st, 2024. Note that although there are similarities between the embedded emissions calculations under CBAM and other embodied carbon calculations, the CBAM methodology (e.g., calculation boundary) differs from that of the GHG Protocol, Product Carbon Footprints (ISO 14067), Life Cycle Assessment (ISO 14040 and ISO 14044) or Environmental Product Declaration (ISO 14025).
Financial adjustment and obligations will not occur until the definitive period in 2026, however penalties may be imposed during the transitional period for failure to submit quarterly CBAM reports.
Interested parties can read and access the CBAM Regulation, Guidance documents, and reporting templates on the European Commission’s website. If you would like to discuss the regulation, how it may impact your facility or company, and how we can support you in meeting your CBAM requirements, please contact McKay Quinn.
