European Commission publishes 'default values' for CBAM transitional phase

Executive summary

With the first EU Carbon Border Adjustment Mechanism (CBAM) quarterly report due by 31 January 2024, the European Commission (Commission) recently released additional guidance.

On 17 August 2023, the Commission adopted the Implementing Regulation governing the rules for the transitional phase of the EU CBAM. The transitional phase of the EU CBAM began on 1 October 2023. Importers of goods subject to CBAM are required to maintain additional records and submit quarterly reports to the Commission regarding "embedded emissions" in the imported goods. On 22 December 2023, the Commission released further guidance and the "default values" to calculate embedded emissions for use during the transitional period.

Detailed discussion

General overview

The EU's CBAM regime entered into force on 1 October 2023. The scope currently covers imported goods in the categories of cement, fertilizer, aluminum, iron and steel, electricity and hydrogen, including a number of upstream and processed downstream products. The scope of coverage will likely be extended in due course under the CBAM regime to include other emission-intensive goods currently covered by the EU Emissions Trading System.

EU importers must identify if they are subject to CBAM obligations and prepare accordingly for the first upcoming deadline. By 31 January 2024, the first CBAM quarterly report must be filed by CBAM reporting declarants for the goods imported during the period 1 October 2023 to 31 December 2023. The CBAM quarterly reporting obligation remains in place until the end of 2025.

From 2026, the CBAM will be fully implemented, which includes additional obligations. Importers will require a new type of authorization to continue importing goods subject to CBAM (authorized CBAM declarant authorization). Importers will be required to purchase and declare CBAM certificates according to the amount of embedded emissions generated during the manufacturing process of the imported goods.

Use of default values

The EU Commission Implementing Regulation 2023/1773 of 17 August 2023 (CBAM Implementing Regulation) confirmed that declarants will be permitted to use default values to report embedded emissions of CBAM-covered imports. On 22 December 2023, the Commission released a publication providing default values for use during the transitional period (pdf).

Default values are only permitted to be used where actual data on the embedded emissions of specific goods at the installation level is not available. Where this is the case, the following conditions apply:

• Until 31 July 2024, and only where the above data is not available, default values published by the Commission can be used to calculate embedded emissions.
• Until 31 December 2024, alternative methods covered by existing carbon pricing schemes, compulsory emission monitoring schemes or verified emissions monitoring schemes can be used to calculate embedded emissions.

In all other cases, the "EU method" is to be applied for determination of actual embedded emissions.

Use of estimated values

The CBAM Implementing Regulation has also clarified the use of estimated values where actual emissions data is not available from installation operators (and the default values by law cannot be used any longer). Reporting declarants may rely on estimated values from operators to calculate up to 20% of the total embedded emissions of so-called complex goods, and language has been updated (previously referred under the term "default values").

Modification of CBAM reports

In practice, a number of CBAM reporting declarants have experienced challenges in providing complete data in the CBAM reports. The CBAM Implementing Regulation states reporting declarants may modify submitted CBAM reports until two months after submission, with reports for the first two reporting periods permitted to be modified until the third report is due. Also, there is the possibility for reporting declarants to submit a request to update reports beyond these deadlines, with a justified reason. However, such requests will only be considered for one year following the submission of the initial report.

Verification of CBAM reports

The CBAM Implementing Regulation has confirmed that during the transitional phase, reporting declarants will not be required to verify quarterly CBAM reports by an independent verifier.

Inward processing

As set out in the draft regulation, where goods placed under inward processing are subsequently released for free circulation, importers must submit CBAM reports containing information on the embedded emissions of the goods. The CBAM Implementing Regulation has set out additional detail on the calculations of embedded emissions for processed products placed under inward processing that are subsequently released. Under this scenario, embedded emissions should be calculated by using the weighted average embedded emissions of the goods under the same CBAM goods category.

Next steps

The EU CBAM will have both direct and indirect impacts on businesses in and outside the EU. With the first reporting deadline fast approaching — 31 January 2024 — action is needed urgently to comply in time.

Other jurisdictions are also considering introducing a CBAM (e.g., the United Kingdom has confirmed it will implement a CBAM as of 2027 — see EY Global Tax Alert, UK Government announces adoption of Carbon Border Adjustment Mechanism (UK CBAM), dated 22 December 2023, and Australia is also considering introducing a CBAM — see EY Global Tax Alert, Australia considers CBAM to address carbon leakage, dated 21 August 2023).

Monitoring the landscape is essential as is a holistic approach across value chains to effectively map and address the impacts of the regime, including broader supply chain transformation elements such as supplier reviews, customs and procurement optimization, or changing product flows.

For more information about CBAM, a recent on-demand webcast replay is available.

Contact Information

For additional information concerning this Alert, please contact:

Carbon Border Adjustment Mechanism

• Carbon Solution Leader: Richard J. Albert, Leipzig
• George Riddell, London
• Mark Feldman, London
• Danny Vu, London
• Eduard Kurz, Vienna
• Philippe Lesage, Diegem
• Milen R Raikov, Sofia
• Ashish Sinha, Zurich
• Andy SY Leung, Shenzhen
• Bente Thenning, Copenhagen
• Pedro Gonzalez-gaggero Prieto-carreño, Madrid
• Marguerite Trzaska, Paris
• Aron Nagy, Budapest
• Alessandra di Salvo, Rome
• Yoichi Ohira, Tokyo
• Martijn Schippers, Rotterdam
• Delphine Poirot, Oslo
• Kasia Klaczynska-Lewis, Warsaw
• Slawomir Czajka, Warsaw
• Zoran Dimoski, Stockholm
• Ilona van den Eijnde, New York
• Duane Newman, Johannesburg

EMEIA Sustainability Tax Services

• Anastasiia Aristarkhova, Amsterdam

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.