The European Union (EU) will be imposing the first-ever carbon tax on imported goods from countries with less stringent carbon dioxide emissions regulations, known as the Carbon Border Adjustment Mechanism (CBAM). Sectors impacted include iron, steel, aluminum, cement, fertilizer, electricity, hydrogen and iron or steel articles. It is expected to begin phased implementation on Oct. 1, 2023.
On Dec. 13, 2022, the EU reached an agreement to impose the first-ever import tax aimed at preventing climate change. This additional tariff will apply to products made using high levels of greenhouse gases as part of the manufacturing process. The proposed regulation must still undergo formal approval and be adopted by the European Parliament and European Council before becoming law, but presently there appears to be minimal friction to passage and implementation.
The main purpose of this tariff, known as the Carbon Border Adjustment Mechanism (CBAM), is to level the playing field for carbon pricing. EU companies have stricter emissions standards that increase their production costs compared to companies operating in other countries. Imposing a carbon dioxide emissions tax on countries with relatively lax emissions requirements helps to offset the EU’s comparatively higher manufacturing cost. It also aims to persuade other countries to adopt similar emissions rules. The EU Emissions Trading System (ETS) will ultimately determine the tax rate; the payable tax will be offset by carbon emissions taxes in the exporter’s country.
The following industry sectors and products are expected to be impacted:
Once approved, the regulation will begin implementation on Oct. 1, 2023, with a transition period until 2026 or 2027 to allow companies time to prepare. Nonetheless, the initial import obligations are expected to start much sooner in January 2023 with the reporting of emissions associated with the production of applicable products.
As part of the reporting requirements, EU importers will be required to file quarterly CBAM submissions, listing their imports of CBAM products and the emissions ‘embedded’ therein. Such emissions are proposed to include direct and indirect emissions occurring during the production process of the imported goods. Once in place, EU importers will use the ETS to buy “CBAM certificates” to reconcile the difference between the carbon price paid in the country of production with the price of carbon allowances in the ETS.
With the new CBAM tax approaching, affected manufacturers and exporters should take immediate steps to prepare for these new requirements such as preparing an impact assessment on carbon inputs into their manufacturing processes. Among others, this assessment should consider the following:
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