In response to the pressing need for stringent climate action, the European Union (EU) has elevated its climate targets, paving the way for introducing the Carbon Border Adjustment Mechanism (CBAM). This mechanism is designed to counteract ‘carbon leakage,‘ a phenomenon where companies relocate their production to countries with laxer climate policies, potentially increasing overall emissions. Understanding and adapting to the CBAM is now essential for businesses eyeing global markets.

Understanding the CBAM

Objectives and Implementation

The CBAM sets out to establish a fair price for carbon emissions associated with the manufacturing of carbon-intensive goods imported into the EU. This ensures that the carbon price of imports aligns with domestic output, promoting cleaner industrial production globally. The mechanism is structured to comply with WTO rules and is part of the EU’s broader decarbonization efforts.

 

Phases of Implementation

The CBAM unfolds in two crucial phases: the transitional phase, initiated on October 1st, 2023, and the payment phase, commencing in January 2026. The transitional phase is a learning period, allowing stakeholders to refine methodologies. Importers report greenhouse gas emissions during this phase without financial implications. In the subsequent payment phase, importers must purchase CBAM certificates corresponding to reported emissions, aligning with the price of EU Emissions Trading Scheme (ETS) allowances.

Understanding the nuances of each phase is essential for businesses aiming to navigate the complexities of CBAM compliance.

 

Transitional Phase (October 1st, 2023 – December 31st, 2025)

The transitional phase, initiated on October 1st, 2023, serves as a preparatory period for stakeholders, including importers, producers, and authorities. During this phase:

• Reporting Greenhouse Gas Emissions

Importers of goods covered by CBAM must report greenhouse gas (GHG) emissions embedded in their imports. This includes both direct and indirect emissions. The first reporting period will conclude on January 31st, 2024. However, financial payments or adjustments are not required during this period.

• Learning and Pilot Period

The primary objective of the transitional phase is to act as a pilot program, allowing all stakeholders to familiarize themselves with CBAM requirements. It provides an opportunity to collect valuable information on embedded emissions and refining methodologies for the subsequent payment phase.

• Flexibility in Reporting Values

Until the end of 2024, companies have the flexibility to report in three ways:

• Full reporting according to the new methodology (EU method)
• Reporting based on an equivalent method (three options)
• Reporting based on default reference values (only until July 2024)

 

Payment Phase (From January 1st, 2026)

Commencing from January 1st, 2026, the payment phase marks a more advanced stage in CBAM implementation:

• Annual CBAM Declaration

Authorized CBAM declarants must submit an annual CBAM declaration detailing the quantity of goods imported into the EU in the preceding year and their embedded GHG emissions.

• Purchase and Surrender of CBAM Certificates

Importers are required to purchase CBAM certificates corresponding to the reported embedded emissions. These certificates must then be surrendered, with their cost determined by the weekly average auction price of EU Emissions Trading Scheme (ETS) allowances expressed in €/tonne of CO2 emitted.

• Phasing-Out of Free Allocation

Simultaneously, the phasing-out of free allocation under the EU ETS will occur in parallel with the phasing-in of CBAM from 2026 to 2034.

• Review and Expansion

A comprehensive review of CBAM’s functioning during the transitional phase will precede the entry into force of the definitive system. The product scope will also be reviewed to assess the feasibility of including other goods produced in sectors covered by the EU ETS in the CBAM mechanism. The review will consist of a timetable outlining their potential inclusion by 2030.

 

Scope and Applicability

Initially applicable to carbon-intensive goods like cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen, the CBAM will eventually cover over 50% of emissions in ETS-covered sectors. Flexibility in reporting values during the transitional phase is granted, but by January 1st, 2025, only the EU method will be accepted.

 

Significance for Accountants and Strategic Actions for Client Support

As legislative transformations like the Carbon Border Adjustment Mechanism (CBAM) reshape the business landscape, accountants emerge as key players in facilitating compliance and guiding clients through this intricate process. Their role extends beyond financial management to actively assisting businesses adapt to the CBAM and its implications.

 

In-Depth Industry Awareness

Accountants must immerse themselves in the evolving dynamics of CBAM, staying attuned to the latest developments, guidelines, and regulations issued by the EU. This depth of industry awareness positions accountants to offer precise and timely advice to their clients.

 

Streamlined Data Collection and Reporting

Collaborating closely with clients, accountants play a pivotal role in orchestrating, collecting, and organizing essential data required for CBAM reporting. This might involve liaising with internal teams or engaging external consultants to ensure seamless data collection processes.

 

Rigorous Compliance Reviews

Regular and rigorous compliance reviews are essential for accountants to verify that clients meet CBAM reporting obligations and adhere to deadlines. By conducting systematic reviews, accountants can identify potential issues or discrepancies, enabling prompt corrective actions.

 

Financial Impact Assessment

Accountants bring their financial acumen to the table by assisting clients in assessing the potential economic impact of CBAM on their business operations. This involves conducting comprehensive cost-benefit analyses, exploring decarbonization strategies, and evaluating how higher carbon prices may influence profitability.

 

Strategic Planning Guidance

Providing strategic guidance becomes paramount as accountants navigate the changing landscape of carbon pricing and emissions regulations with their clients. This may include exploring sustainability initiatives, identifying investment opportunities in low-carbon technologies, and aiding in developing long-term sustainability plans.

Through these multifaceted efforts, accountants become indispensable partners in ensuring compliance with CBAM regulations and aiding businesses in transitioning to a sustainable and low-carbon future.

Position your businesses for success in an environmentally conscious global market. Explore Environmental, Social, and Governance (ESG) insights and solutions. Reach out.

 

Source: European Commission