The first year of the EU’s Carbon Border Adjustment Mechanism has been bumpy. Companies subject to reporting obligations are complaining about high efforts and impractical implementation rules. From corporate implementation, we have identified 5 work areas for a pragmatic design of the definitive rules starting 2026.

Off to a bumpy start

Exactly one year ago, on October 1, 2023, the EU Carbon Border Adjustment Mechanism (CBAM) was launched. Since then, imports of CO2-intensive goods made of iron & steel, aluminum, fertilizers, cement, hydrogen and electricity have been subject to reporting obligations.

A carbon-based levy is to be introduced in 2026. The transitional period until then is considered a test phase to give affected companies and authorities in charge time to prepare.

Over 100,000 industrial companies in the EU are subject to the reporting obligations, primarily from the metal, energy, chemical and construction sectors. They complain about high red tape and impractical implementation rules.

Industry associations call out various implementation challenges. In public statements, both the International Chamber of Commerce and DIHK with BDI in Germany had called for various improvements.

All beginnings are difficult. The introduction of the EU Emissions Trading System (ETS) in 2005 was also accompanied by teething troubles. CBAM is the world’s first carbon border adjustment, so there has been a shortage of practical experience. One year in, the CBAM community has gathered many insights.

Experience from corporate practice

Since the CBAM launch, we at CO2 IQ have engaged on CBAM implementation with over 100 EU companies – many SMEs from different industrial sectors. These insights bring forward 5 work areas of improvement.

Proportionate efforts

Most importantly, we see a great variation in financial exposure (i.e. emissions) and required implementation efforts (i.e. reporting complexity) by affected companies. This results from the import dependency of the supply chains.

Experience to date

Particularly in metals wholesale, machinery and plant engineering, required CBAM efforts can be disproportionately high. Here we see that many SMEs have small imports and embedded emissions. At the same time, their reporting complexity can be very high with broad goods portfolios and large number of suppliers.

The EU Commission and also national authorities, like DEHSt in Germany, require  reasonable efforts to obtain actual emissions data. These should be proportionate to the size of the company or the embedded emissions. Yet, we lack a precise definition of (dis)proportionate efforts.

Open issues

So far, only consignments with a value of less than EUR 150 have been exempt from the CBAM obligations in accordance with §23 of EU Regulation 1186/2009.  This threshold, however, is not relevant for imports by industrial companies. Hence, even small importers with a very low climate impact are affected.

The planned abolition of this threshold provides an opportunity to redefine a practicable de-minimis value for CBAM. The interpretation of the DGEC in France is to be noted. They focus their checks on quarterly reports with emissions of more than 100 tCO2.

Reliable technology

Communication between the reporting companies and authorities at EU and national level takes place via the CBAM transitional registry. Quarterly reports are to be submitted via this system.

Experience to date

The filing of the first report for Q4/23 faced various technical problems. Companies in Germany had no access until mid-January. Many companies reported system failures and data losses.

Together with the postponement of the first submission deadline, these glitches have damaged credibility. In the meantime, various technical improvements have been made. The creation of reports via the online masks or the XML uploads have been made easier, but still suffer from several shortcomings.

Open issues

The transitional registry should be interoperable with existing customs systems. Customs data is used for checks by the authorities. These data would also make it easier for companies to prepare reports. Today, they compile such data from various internal sources, sometimes manually.

The transitional registry will serve as the base for the definitive registry. Herein, the admissions of CBAM declarants and the administration of CBAM certificates is to be set-up already in 2025. As such, a continuous transition is needed. 

From 2025, manufacturers of CBAM goods should also be able to get registered with their installations and emissions data. Such access would reduce the burden for  EU companies to obtain the necessary data. 

Realistic emission values

From Q3 of this year, CBAM reports require actual emissions values from the manufacturers of CBAM goods. These values are to be calculated using CBAM methods. Until then, default values published by the EU have been applicable.

Experience to date

Until now, the majority of companies has made use of these default values in order to reduce the reporting effort. Inquiries for actual data from the suppliers of CBAM goods show very mixed results. 

Many times, there is no response or data. If data is provided, it is often via Environmental Product Declarations (EPD). Even if complete data is available in the EU XLS templates, the methods used are difficult to understand. Actual emissions data remains scarce.

The compilation of such data is a lengthy process. In addition, CBAM requires data to be recorded over an entire calendar year. Consequently, CBAM compliant data can only be available from manufactures that had already established reliable emissions monitoring in 2023 before the start of CBAM.

Open issues

It is not yet clear how to deal with estimated values or values that cannot be validated. Neither companies nor authorities have simple means to run data checks. And manufactures have an incentive to report low values.

This is problematic as the reported data are to be used to update the default values in use. From 2026, national values are replacing the existing global values. These can be used with a mark-up if verified emissions data is missing.

Accredited verifiers will then need to verify all emissions data. The rules for the verification are supposed to be published this year. It remains to be seen how sufficient verifier capacities can be built up by 2026.

Forward-looking cost calculation

From 2026, CBAM certificates will have to be purchased for the embedded emissions. Certificate prices will be linked to prices for allowances in the EU ETS.

Experience to date

So far, only a few companies are considering financial CBAM impacts. Exact calculations and an understanding of the calculation methodology remain largely absent in affected companies.

It is generally assumed that the costs will remain low in the first years of the ramp-up of the CBAM levy. However, significant CBAM surcharges on purchasing costs may already be due in 2026, depending on emission values.

Open issues

Reliable cost calculations are already possible. Upcoming implementing regulations in 2025 will detail the calculation of the adjustment for free ETS allowances and deductions of CO2 prices paid in third countries.

Limiting circumvention

Possible circumvention mechanisms should be identified by the Commission. Targeted prevention measures are needed to lower the risk of carbon leakage.

Experience to date

For now, we have not yet seen companies adopting their supply chains to lower future CBAM exposure. For now, a wait-and-see strategy prevails.

However, more and more SMEs are outsourcing their import business and thus, their CBAM obligations. Hence, EU imports are increasingly concentrated in the hands of companies that can handle administrative CBAM and customs processes.

Open issues

In some contexts, CBAM obligations can be circumvented by re-declaring imported goods with codes of downstream goods.

In the long term, value chain steps could be moved from Europe if downstream goods are not covered by CBAM. To avoid such reallocations, a report on a potential downstream CBAM expansion is expected by the end of 2024. A further expansion would make CBAM even more comprehensive than the EU ETS.

There are also gaps with regard to precursors. In particular, not having scrap be covered by CBAM presents a disadvantage for EU manufacturers. The CBAM review planned for 2025 will examine an expansion – including to other sectors and emissions.

Outlook for further CBAM rules

CBAM needs to ensure pragmatic implementation rules. The upcoming regulations will set the course for the definitive implementation from 2026.

There can be trade-offs. An expanded CBAM coverage can protect domestic industrial segments and prevent CO2 leakage. At the same time, even more companies would fall under the CBAM rules, including many who face disproportionate efforts.

CBAM impacts also need to be watched beyond the EU. With the CBAM methods the EU is dictating how emissions are monitored in third countries. Non-EU governments are already looking into expanding their own CO2 pricing. EU President von der Leyen recently announced her support.

Sources and further information:

• European Commission: Carbon Border Adjustment Mechanism – Q&A
• EU: Implementing Regulation 2023/1773 for reporting obligations during the transitional period
• EU: Regulation 2023/956 establishing a carbon border adjustment mechanism

Photo by Bernd 📷 Dittrich on Unsplash