CBAM – Is your company ready for the new reporting requirements?

Executive Summary

The EU's Carbon Border Adjustment Mechanism (CBAM) is a crucial component of the EU's Green Deal. It aims to motivate non-EU manufacturers to reduce their carbon emissions. Importers of a range of products, including iron, steel, cement, aluminum, fertilizers and electricity, which are subject to CBAM, must report the emissions produced during the manufacturing process and will eventually be required to pay a levy to offset these emissions.

As critical deadlines loom, specifically the transition from default values to actual emissions reporting for imports starting in July 2024, importers must acquire the necessary emissions data from the manufacturers of the products they are importing.

Below we elaborate on how businesses should prepare for the submission of CBAM reports using actual emissions data  as well as on the main lessons learned from the first 2 reporting cycles.
 

Background

The Carbon Border Adjustment Mechanism aims to prevent carbon leakage by incorporating carbon costs into the price of imports. The Regulation has foreseen a transition period for businesses to gradually adjust to these new reporting obligations. This transition period started in October 2023 and runs until end 2025.
 

Changes Starting July 2024

Starting from Q3 2024, the CBAM reporting requirements will undergo significant changes. Importers will need to shift from using default values to reporting actual embedded emissions. The obligation applies for products being released into free circulation as from July 1st 2024.

This means importers are obliged to procure actual emissions data for all CBAM goods from their suppliers or manufacturers. The reporting methods will be:

1. Full Reporting According to the CBAM Methodology: Importers must report actual embedded emissions. Determining these embedded emissions should be done by the manufacturers based on the detailed CBAM methodology as prescribed by the CBAM Regulation.
   
   
2. Reporting Based on an Equivalent Method:  For production installations in countries with emission monitoring and reporting methods that lead to similar coverage and accuracy, there will be the option to report emissions based on that equivalent method. This could include:

• A recognized carbon pricing scheme.
• A compulsory emission monitoring scheme from the country of origin.
• An installation-level emission monitoring scheme validated to meet EU requirements.
  
  Please note that this 2nd method is only applicable for 2024 and will no longer be usable as from 2025.
   

Obtaining these data may be challenging in some cases and the outreach to suppliers and manufacturers should therefore be done carefully and thoroughly.

We recommend importers to inform and educate their suppliers, taking into consideration their specific business relationship, about the CBAM data requirements and to start this exercise well in advance of the reporting deadline of October 31st 2024.

As CBAM reporting declarants remain liable for the CBAM compliance, we also recommend to do a sanity check of the received emissions data.

Companies who import products they have manufactured themselves (or companies from within the same group of companies) outside of the EU should clearly focus on calculating the carbon footprint of the produced products as per the very specific CBAM calculation methodology.
 

Reporting Until July 2024

Since October 2023 and the start of the transition period, EU businesses are required to file quarterly reports on their imports of CBAM-covered products. Declarants have been able to apply default values to all imported goods, simplifying the initial reporting process for the first three reporting periods (Q4 of 2023, Q1 & Q2 of 2024). This means that the CBAM report due by July 31st 2024 will be the last one for which default values can be used.

Despite the option to use default values, fewer CBAM reports have been submitted than expected during the first reporting periods.

We have noticed that the Belgian National Competent Authority for CBAM has started cross-checking the submitted CBAM reports with the customs declarations for the corresponding quarter. Various companies that have imported CBAM-covered products during the last quarter of 2023 (based on submitted import declarations) without filing a CBAM quarterly report have been contacted and notified of their failure to report, along with a request to rectify the infringement. Time will tell whether this is the start of more stringent CBAM enforcement.

It is also important to highlight that CBAM reporting declarants can modify and correct their first two quarterly reports until July 31, 2024. For the subsequent reports, the standard correction window of two months post-reporting quarter will apply.
 

Final Note

The upcoming changes in CBAM reporting emphasize the need to keep CBAM as a key consideration in business operations. Although the transition period serves as a learning curve, CBAM compliance will grow more complex over time. Based on the lessons learned from the first 2 reporting cycles, businesses should consider how they can make their CBAM compliance management more efficient and robust in order to repeatedly gather the necessary data, submit correct reports and eventually purchase and surrender CBAM certificates.

Businesses should stay in close contact with their suppliers and manufacturers to ensure they can report actual emissions. Additionally, they should look ahead, beyond the transition period, and understand the long-term implications of CBAM to develop an effective strategy including possible mitigation.