Liz Newmark, journalist in Brussels



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The Carbon Border Adjustment Mechanism (CBAM) regime came into force on 17 May 2023. It aims is to put a fair price on carbon emitted during the production of carbon-intensive goods entering the EU and to encourage cleaner industrial production in non-EU countries, according the European Commission.

Nikoletta Merkouri, tax director at EY Greece, says companies must have responsible people to manage the CBAM, who will define the EU tariff codes of imports and their country of origin to assess liability. They should also assess the CBAM’s financial impact and mitigation via sourcing strategy and production planning.

‘The Carbon Border Adjustment Mechanism increases the already high cost of products’

General challenges relate to data identification and implementation, the CBAM’s impact on supply chains, import costs and obtaining authorised CBAM declarant status, Merkouri says. ‘Risk areas include penalties for reporting errors, decreased market value if the trade lanes and workflows have not been decarbonised, supply chain disruption if impacted products can no longer be imported, and penalties for non-compliance – so the CBAM increases the already high cost of products.’

Deduce and declare

Under CBAM, EU importers of goods covered by the regulation must deduce and declare the carbon dioxide (and in some cases perfluorocarbons) emissions embedded in goods and inputs – paying levies if they exceed EU standards, with deductions allowed to cover exporting country carbon taxes and other pricing systems.

The introduction of CBAM is aligned with the phase-out of free allowances under the EU Emissions Trading Scheme (ETS) to support decarbonisation of EU industry, notes the EU executive.

This comprehensive legislation’s requirements will be phased in. The first products covered are iron and steel, cement, fertilisers, aluminium, electricity, hydrogen and downstream products such as bolts and screws. The goods’ tariff code determines if a product is subject to CBAM.

Chemicals and polymers might be included later, subject to assessment before the end of a transition period (December 2025). Full inclusion of all products covered by the EU’s emissions trading system (ETS) is planned by 2030 through expansion to cover petroleum products, glass, all non-ferrous metals and paper, for instance. In theory, other greenhouse gases (GHG) could be included as the number of products expands, such as nitrous oxide and methane.

‘The biggest challenge that CBAM initially poses is data availability regarding the measurement of, and reporting on, emissions’

Moreover, from 1 October 2023, affected businesses only need to report on carbon emissions embedded in goods imported into the EU, with the only financial impact being penalties for non-reporting. Financial obligations take effect from January 2026, however, for the first tranche of affected imports.

Data availability

According to KPMG Netherlands’ senior tax manager Nicole de Jager and tax lawyer Merijn Betjes, the biggest challenge that CBAM initially poses is data availability regarding the measurement of, and reporting on, emissions.

The KPMG experts say: ‘Some professionals are well prepared for the reporting obligations, but others may only have a general awareness of CBAM and that all affected companies will have to ‘create a core team to manage this topic and perform an impact assessment to determine strategies.

‘Entities already either voluntarily reporting on, or mandated by legislation (eg carbon tax regulations) to report on, their emissions are better positioned to provide the requisite emission data than businesses with no measurement systems in place.’

As a supplementary measure, CBAM will impose a charge on the embedded carbon content of third-country imported products equal to the charge imposed on the production in Europe of such goods under the ETS, the KPMG experts add.

Paul Gisby, director for professional services at Accountancy Europe, says that although the CBAM levy will fall on importers, they will need supplier manufacturers’ cooperation to report the embedded GHG emissions, ‘especially as under the definitive regime from January 2026, the calculation of embedded emissions will be externally verified (including site visits to the production facilities)’.

Robust reporting systems

Reporting systems must also be robust enough to calculate embedded emissions by 2026, when ‘CBAM declarants need to have bought CBAM certificates covering at least 80% of embedded emissions for each quarter end.

‘If businesses cannot provide the embedded emissions data, their cost will be based on the 10% least efficient producers in the EU,’ he adds. The carbon cost under the ETS was ‘around €32 per tonne just over two years ago, but has recently exceeded €100’.

Businesses should also consider preparation for GHG reporting, including the development of GHG methodology and IT systems for GHG accounting and product footprint tracking.

They should also consider the sales impact of the fact that products subject to CBAM may be regarded as less environmentally friendly, and the opportunities of buying products and inputs ‘greener’ than the industry average.

However, if non-EU countries introduce an ETS compatible with the EU’s ETS, this could remove or reduce CBAM’s impact on exporters, Gisby says.

‘Importers will favour goods with a lower carbon content as they will be less expensive’

With global climate actions intensifying, the UK, Canada, USA, New Zealand and Australia are all considering their own forms of CBAM, note KPMG’s de Jager and Betjes, ‘so businesses globally should begin assessing what the legislative changes may mean for their operations – whether it be sourcing energy from alternative suppliers, developing storage technologies, analysing existing supply chains, insulating buildings, preparing for energy audits, and/or transforming to a more sustainable environment’.

Other challenges

Longer-term CBAM challenges include companies assessing their competitiveness based on product carbon content. ‘Third [non-EU] country producers will face greater pressures to lower emissions, because importers will favour goods with a lower carbon content as they will be less expensive,’ say KPMG’s de Jager and Betjes.

KPMG also warns of uncertainty over accounting for CBAM-related transactions such as the VAT treatment of CBAM transactions, and if CBAM certificates will be allowed as a tax deduction.

Additional audit procedures may be required to ensure correct accounting of CBAM costs, it said: ‘Due to such uncertainty, it is important that implementing and delegated acts [regulations] – drafts of which are expected in June or July — address these issues,’ KPMG’s experts say.