What You Need to Know About The EU’s CBAM

The Carbon Border Adjustment Mechanism (CBAM) entered its transitional period in October 2023. It was designed to curb offshore emissions in EU production and has significant implications for businesses in the EU and suppliers outside the EU. This article explores the CBAM and the key things companies need to do for compliance.

What is the CBAM?

With climate-related legislation on the rise, EU operations are feeling the pressure to reduce emissions and transition to low-carbon methods, with one consequence being the outsourcing of carbon emissions to other countries beyond the jurisdiction of EU regulations. The opportunity to import foreign goods to avoid penalties or carbon ceilings impairs the effectiveness of climate legislation.

EU companies are no strangers to the region’s proactive efforts towards wide-scale decarbonisation within its borders, but regulators are starting to pursue accountability through the EU’s global production chains. The CBAM was designed to prevent outsourced emissions, targeting emissions in the import of goods or materials in industrial production. Think of it as a carbon pricing and tax system comprised of two parts: emissions monitoring (entailing carbon footprinting) in the first stage and a carbon tax at a later stage. 

Who does it affect and how?

The CBAM currently only applies to the most carbon-intensive sectors: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The requirements if you are a manufacturer in these sectors are similar: submit quarterly reports on the embedded emissions in the import of the goods used in production, specifically goods listed in Annex I of the CBAM Regulation, and, from January 2026, buy CBAM certificates equivalent to the amount of embedded emissions. The certificate system serves as a license to import said emissions and forces a company to absorb the cost of the emissions. At present, details of the certificates and their value are still pending.

Besides EU manufacturers in the highlighted sectors, foreign suppliers are also affected as they must disclose the carbon footprint in the export of goods. High-emissions suppliers face a loss in competitive advantage as EU importers seek out low-carbon alternatives. 

How can companies meet compliance?

As it came into effect in October 2023, companies have two years to prepare before the carbon tax kicks in. This is a window of opportunity to examine the level of emissions and ways to reduce those emissions to minimise the CBAM certificates that a company needs to buy.  

In-scope companies must master three things to not only achieve compliance but to also explore opportunities for cost-savings:

Carbon footprinting

The internationally accepted standard for calculating greenhouse gas emissions is the GHG Protocol. Suppliers must be informed of the regulation and what you require of them. This involves supplier engagement and data collection processes that are traceable. Your suppliers may not be familiar with carbon footprinting in which case you should be prepared to provide guidance or training.

‍Supply chain due diligence

Appoint the resources and expertise to ensure the submission of accurate emissions data and to verify the data independently. An ESG software can be useful in enabling your supply chain to submit data while providing transparency on the data source.

Data management

Carbon footprinting involves a sizeable chunk of data, and a foreign supply chain further complicates the situation. The introduction of the CBAM certificates later on will add an additional layer to the data management process, as emissions will need to be quantified, tracked, and converted to the value of certificates. We suggest automating the data collection process as much as possible using a collaborative platform to exchange data with suppliers and to calculate and project certificate costs, as well as to analyse various alternatives for the most optimum financial outcome. Some reporting software such as Daato’s very own can also help companies prepare the quarterly report.