What is the EU’s Carbon Border Adjustment Mechanism (CBAM)?

Explore the EU's Carbon Border Adjustment Mechanism (CBAM) and its impact on global trade. Learn how Arbor helps you navigate this incoming climate policy.
Updated on
November 16, 2023
What is the EU’s Carbon Border Adjustment Mechanism (CBAM)?
Table of Contents

In an era where climate change is at the forefront of global discussions, the European Union's Carbon Border Adjustment Mechanism (CBAM) stands as a pivotal policy in the fight against environmental degradation. This mechanism is crucial for companies involved in international trade, particularly those dealing with the EU. Let’s delve into what CBAM is, how it works, its requirements and the implications for your company, as well as how Arbor can assist you in navigating this new terrain.

What is CBAM?

CBAM is a groundbreaking initiative introduced by the EU, aimed at tackling the issue of offshoring emissions. This phenomenon occurs when companies transfer their manufacturing processes to countries with less stringent environmental regulations, resulting in increased global carbon emissions. The primary goal of CBAM is to mitigate this by implementing a carbon border tax, effectively levelling the playing field for EU manufacturers and encouraging more sustainable global trade practices.

How does CBAM work?

The implementation of CBAM is set to unfold in stages, starting from 1 October 2023. The initial focus will be on sectors with high carbon emissions, such as cement, fertilizers, iron and steel, aluminum, hydrogen, and electricity. During the Transitional Period from 2023 to 2025, EU importers are required to report the emissions of imported goods without any financial liability. Post this period, CBAM will extend to more sectors and from 1 January 2026, the carbon price will be charged, aligning the cost of imports with domestic products' carbon pricing.

What are the requirements of CBAM?

Under CBAM, importers must submit detailed quarterly reports, which include information about the quantity, type, and embedded emissions of imported goods. These reports are expected to encompass the country of origin, production location, and specific emissions data. From 2026, it becomes mandatory for importers to purchase CBAM certificates to cover the embedded emissions of the imported goods.

When does CBAM become mandatory?

CBAM's reporting requirements have already commenced as of October 1, 2023. However, the mandatory financial component, where importers will be required to pay for the carbon emissions, will only start from January 1, 2026.

Who needs to comply with CBAM?

CBAM compliance is essential for EU importers of goods from non-EU countries, especially those in high-emitting industries like cement, steel, and aluminum. Additionally, non-EU manufacturers exporting to the EU will need to provide necessary emissions data, making it crucial for large organizations and suppliers involved in EU trade to adapt to these regulations.

Why should you care about CBAM?

CBAM is not just about regulatory compliance; it's about staying competitive in a rapidly evolving global market. Companies exporting to or importing from the EU need to adapt to CBAM to avoid financial penalties. This mechanism also creates a competitive advantage for low-emission products and suppliers, as high carbon taxes will impact the profitability of carbon-intensive products. Furthermore, the need for detailed quarterly emissions reporting will push companies to gain a deeper understanding of their supply chains and production processes, necessitating robust data collection and carbon footprint analysis tools. For more insights on global carbon emissions and their impact, read our article on Global Carbon Emissions.

How can Arbor help you with CBAM?

Arbor's Carbon Management Platform is uniquely positioned to assist companies in adapting to CBAM. Our platform facilitates comprehensive data collection for a larger number of products and supply chains, including ERP integrations and other automated data collection methods. We provide accurate carbon footprints for each product to feed into reporting. Here’s how Arbor’s tools help with CBAM:

1. Carbon Calculator

Our advanced calculator allows you to accurately determine the carbon footprint of your products, providing the necessary data for CBAM compliance. It features material-level carbon impact analysis, automated hotspot detection, and industry-average comparisons.

2. Carbon Reporting

Generate detailed reports on your company's emissions, including Scope 1, 2, and 3. This tool helps in aligning your reporting with CBAM requirements, ensuring all necessary data is accurately accounted for and readily available.

3. Carbon Insights

Gain actionable insights into your carbon-intensive activities. Our platform helps identify areas for emission reduction, aligning with CBAM’s focus on decreasing carbon footprints across supply chains.

4. Carbon Insights

Demonstrate your commitment to sustainability through transparent reporting. Our tools enable you to showcase your carbon footprint and reduction efforts, building trust with stakeholders and consumers in the EU market.

CBAM represents a significant shift in how environmental impact is managed and reported in international trade. It’s imperative for companies involved in EU trade to understand and adapt to these changes. Arbor's Carbon Management Platform provides the tools and expertise needed to comply with CBAM, ensuring your company has the ability to meet regulatory standards and also leads the way in sustainable business practices.

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What is the EU’s Carbon Border Adjustment Mechanism (CBAM)?