Webinar 1: Avoid CBAM MISTAKES: Report Accurate Source Data 

The first CBAM webinar of the series webinars that will be held every three months, titled “Avoid CBAM Mistakes: Report Accurate Source Data”, was organised by Normec Verifavia and NAVIS. It was led by Nicolas DUCHENE, the president of Normec Verifavia, Patricia PINILLA, the Sustainability Business Unit Director of Normec Verifavia, Davide PALUMBO, the Managing Director of NAVIS and Harry HORNER, the Carbon Advisor of NAVIS. Almost 80 people attended the webinar from Asia and Europe. This initial webinar set the general context of CBAM and highlighted the key challenges faced by proactive, compliant organizations. 

Context

The Carbon Border Adjustment Mechanism (CBAM) is a crucial element in the European Union’s efforts to combat climate change and promote sustainable economic practices. Announced as part of the European Green Deal, CBAM aims to address the issue of carbon leakage, where companies relocate production to countries with less stringent climate policies. By imposing a carbon price on imports of certain goods from outside the EU, CBAM seeks to ensure a level playing field for EU industries and incentivize global emissions reductions. 

Sectors Covered in the Scope of CBAM 

CBAM primarily targets sectors with high carbon emissions that are at significant risk of carbon leakage. The initial scope includes : 

• Cement: One of the largest sources of industrial carbon emissions. 

• Iron and Steel: Critical to construction and manufacturing, with high energy consumption and carbon emissions. 

• Aluminum: Energy-intensive in production, contributing significantly to greenhouse gas emissions. 

• Fertilizers: Key to agriculture but involving processes that emit substantial amounts of CO2. 

• Electricity: Significant due to the reliance on fossil fuels in many non-EU countries. 

These sectors are foundational to the EU economy but also represent major sources of carbon emissions. By including them in the CBAM’s scope, the EU aims to drive substantial reductions in global carbon emissions. 

Timeline for CBAM Compliance 

The implementation of CBAM is structured in phases to allow industries and trading partners to adapt. The key milestones are: 

2023-2025: Transitional phase focusing on data collection and reporting. During this period, importers will need to start reporting the carbon emissions embedded in their goods but will not yet face financial adjustments. 

2026 Onwards: Full implementation phase. Importers will need to purchase CBAM certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules. 

This phased approach allows for a smoother transition, giving businesses time to adjust their supply chains and carbon management practices. 

Implementation of the CBAM Certificate System

In the definitive phase, the CBAM certificate system will be fully implemented. EU importers will be required to register, purchase, and surrender certificates based on the embedded carbon emissions. This phase will also see the gradual introduction of CBAM alongside the phase-out of free allowances under the EU Emissions Trading System (ETS). Over time, there will be fewer free allowances allocated to EU ETS installations, ultimately leading to their complete elimination. 

Starting in 2027, importers will face stringent verification requirements. They will be required to report all their emissions for the previous year (2026) by May 31st. These reports must be verified by an accredited verifier, ensuring accuracy and transparency in the reporting process. This mandatory verification is critical for maintaining the integrity of the CBAM system and ensuring that all parties adhere to the same standards. 

Financial Impact

The financial implications of CBAM in its definitive phase will be substantial. Importers will incur costs associated with purchasing CBAM certificates, which are priced based on EU ETS allowance auctions. 

Reporting methods

Effective reporting is essential for the success of CBAM. The CBAM includes different reporting methods such as:  

• Full reporting according to the new methodology (EU method): This method involves detailed, standardized data collection on greenhouse gas emissions as prescribed by the EU. It ensures high accuracy and transparency in emissions reporting, requiring comprehensive documentation of all. This methodology is designed to provide the most precise and reliable emissions data, aligning with the EU’s rigorous environmental standards. 

• Reporting based on an equivalent method: Available until January 2025, this method uses emissions reporting systems from other countries that are equivalent to the EU’s CBAM methodology. It provides flexibility by acknowledging robust non-EU emissions reporting frameworks. However, these systems must meet EU standards for accuracy and transparency to be accepted. This method offers a transitional compliance path for importers using well-established international reporting practices. 

• Reporting based on default reference values: This method, is available only until July 2024, uses default reference values provided by the EU. These values are standardized estimations of emissions based on typical production methods and energy use. The European Commission published these reference values to facilitate easier compliance during the initial stages of CBAM implementation. However, this method will no longer be applicable after July 2024, necessitating the use of more precise reporting methods. 

Industry Trends and Compliance Challenges

As the Carbon Border Adjustment Mechanism (CBAM) continues to shape the regulatory landscape, companies are grappling with the complexities of compliance, such as: 

• Identifying the Scope of Regulation: One of the primary challenges faced by companies is accurately identifying whether their products fall under the scope of CBAM. Many importers have been receiving notifications from customs to register on the CBAM portal and begin reporting. However, there is a prevalent trend in the industry to group customs clearance items under parts of the main unit that the company deals with. 

• Relevant Dates for Reporting: There is confusion about which date is relevant for CBAM reporting. The customs clearance date, when goods are released for free circulation, is the critical date for reporting, not the goods receipt date. This distinction can affect which quarter the imports fall into for reporting purposes. 

• Country of Origin and Manufacturer Information: Understanding the actual country of origin is crucial. Often, vendors outside the EU consolidate parts from various sources under one shipment. However, CBAM requires detailed information about the manufacturer, not just the vendor. This can be challenging if vendors are reluctant to disclose their sources. 

Penalties for Non-Compliance

As the Carbon Border Adjustment Mechanism (CBAM) moves from its transition phase into full implementation, EU importers must be acutely aware of the penalties associated with non-compliance. The draft penalties outlined in the CBAM legislation are stringent and aim to enforce rigorous adherence to the new carbon reporting and credit system. Here’s an overview of the penalties and their implications for importers. 

• Transition Period Penalties (2023-2025): Companies that fail to report their carbon emissions accurately can face fines of up to 100,000 € per unreported ton of CO2.  

• Implementation Period Penalties (2026 Onwards): Like the transition period, fines for failing to report carbon emissions or having missing coverage (carbon credits) can reach up to 100,000 € per unreported ton of CO2. In addition to financial penalties, the EU has introduced the potential for revoking import licenses for listed commodities.

Next Webinar

The second CBAM webinar is planned to be held on the 10th of October 2024 and will focus on the Auditing Requirements, including the verification process. Register here: Click here to Register for the LinkedIn LIVE