The European Commission recently published guidance on the application of the Carbon Border Adjustment Mechanism (CBAM) that addresses challenges faced by importers in collecting data to fulfil their reporting obligations under CBAM. The commission observed in the guidance that many suppliers lack the technical means and the ability to collect process-related emissions data and in some cases, there seems to be an unwillingness to cooperate. The guidance released by the commission on 9 August 2024 provides information on how to deal with situations where importers fail to obtain the necessary information before the CBAM reports are due (one month after the end of each calendar quarter).
CBAM was introduced in the EU as a regulation (Regulation (EU) 2023/956), with a transitional phase applying during the period 1 October 2023 – 31 December 2025 and the regulation applying in full as from 2026 (for prior coverage, see the article in the July 2023 issue and the article in the October 2023 issue of Indirect Tax News). An implementing regulation (Regulation (EU) 2023/1773) published in the EU official journal on 15 September 2023 details the transitional reporting obligations for EU importers of CBAM goods, as well as the transitional methodology for calculating embedded emissions released during the production process of CBAM goods.
The CBAM mechanism—which applies only to goods imported from outside the EU—aims to reduce CO2 emissions by encouraging non-EU manufacturers to reduce their carbon emissions and promote more sustainable industrial production by placing a price on greenhouse gas emissions from the production of specified products (currently goods imported into the EU from the cement, iron and steel, aluminium and some chemical industries (fertilizers and hydrogen), and electricity). CBAM imposes due diligence and reporting requirements on covered importers. During the transitional phase, importers must submit a quarterly report to the European Commission that contains information on the embedded emissions in goods imported during the relevant quarter, including the volume of imported goods, the actual total of direct and indirect emissions, the carbon price due in the country of origin, etc. Importers will have to register with the CBAM registry in 2025 and starting in 2026 will have to submit annual CBAM reports and purchase/surrender CBAM certificates to cover the imports of covered goods, which will effectively operate as a tax on the embedded emissions aiming create a level playing field with activities subject to the EU Emissions Trading System.
To fulfil their obligations, covered importers must oversee their supply chain, selecting suppliers not solely for product quality and punctual delivery, but also by evaluating the environmental footprint of emissions generated throughout the production cycle.
As from 1 Jul 2024, a new period began for covered importers. Such importers are now required to report actual embedded emissions for each CBAM product imported into the EU (rather than default values), along with a range of supplementary information relating to the operators of production facilities, the establishments where processing takes place, the production routes and the reporting methods used.
In updates to the Questions and Answers' document, the Commission emphasises that importers must make every effort to obtain actual emissions data from their suppliers or manufacturers of covered CBAM products. Importers that are unable to obtain this data must demonstrate that they have taken all reasonable efforts to achieve the target. Furthermore, importers must utilise the ‘comments’ section in the CBAM transitional registry to justify their situation and attach evidence of their diligent attempts and measures taken to obtain the necessary data from suppliers and/or manufacturers.
National competent authorities must assess whether registrants have taken the necessary steps to submit complete, accurate and timely CBAM reports. They can consider any justified difficulties faced in acquiring actual emissions data from CBAM goods manufacturers. National competent authorities may impose penalties where the CBAM report is incorrect or incomplete or where the reporting importer fails to include sufficient justification for using reporting rules other than those listed in the implementing regulation. In determining whether to impose penalties, the authorities must consider the specific efforts and resources dedicated by the reporting importer to comply with the rules. This includes unproductive data collection attempts, reminders and follow-ups with non-EU manufacturers. The authorities also will assess the adequacy of these efforts and resources in relation to the importer’s economic size, the total volume of CBAM imports and their associated emissions.
In addition, the European Commission reiterates that for imports after 30 June 2024, the use of default values will be possible only for complex goods and up to 20% of the total incorporated emissions. Global default values will only refer to the Combined Nomenclature Code, while during the definitive phase of CBAM, default values referring to individual countries/regions of origin of the goods will be made available based on data collected during the transitional period.
The complexity in tracing production-related emissions data for CBAM goods is often linked to the complexity of business operations in which different traders and collectors of export goods are involved, lacking a direct relationship between the importer and producer.
Guido Calderaro
Paola Levato
BDO in Italy
CBAM was introduced in the EU as a regulation (Regulation (EU) 2023/956), with a transitional phase applying during the period 1 October 2023 – 31 December 2025 and the regulation applying in full as from 2026 (for prior coverage, see the article in the July 2023 issue and the article in the October 2023 issue of Indirect Tax News). An implementing regulation (Regulation (EU) 2023/1773) published in the EU official journal on 15 September 2023 details the transitional reporting obligations for EU importers of CBAM goods, as well as the transitional methodology for calculating embedded emissions released during the production process of CBAM goods.
The CBAM mechanism—which applies only to goods imported from outside the EU—aims to reduce CO2 emissions by encouraging non-EU manufacturers to reduce their carbon emissions and promote more sustainable industrial production by placing a price on greenhouse gas emissions from the production of specified products (currently goods imported into the EU from the cement, iron and steel, aluminium and some chemical industries (fertilizers and hydrogen), and electricity). CBAM imposes due diligence and reporting requirements on covered importers. During the transitional phase, importers must submit a quarterly report to the European Commission that contains information on the embedded emissions in goods imported during the relevant quarter, including the volume of imported goods, the actual total of direct and indirect emissions, the carbon price due in the country of origin, etc. Importers will have to register with the CBAM registry in 2025 and starting in 2026 will have to submit annual CBAM reports and purchase/surrender CBAM certificates to cover the imports of covered goods, which will effectively operate as a tax on the embedded emissions aiming create a level playing field with activities subject to the EU Emissions Trading System.
To fulfil their obligations, covered importers must oversee their supply chain, selecting suppliers not solely for product quality and punctual delivery, but also by evaluating the environmental footprint of emissions generated throughout the production cycle.
As from 1 Jul 2024, a new period began for covered importers. Such importers are now required to report actual embedded emissions for each CBAM product imported into the EU (rather than default values), along with a range of supplementary information relating to the operators of production facilities, the establishments where processing takes place, the production routes and the reporting methods used.
New guidance
As noted above, the new guidance released by the European Commission addresses situations in which suppliers fail to obtain the necessary information before the CBAM reports are due. The clarifications provided by the Commission address the challenges importers face during the data collection process (lack of response to requests for information, inaccuracy and incompleteness of the data received).In updates to the Questions and Answers' document, the Commission emphasises that importers must make every effort to obtain actual emissions data from their suppliers or manufacturers of covered CBAM products. Importers that are unable to obtain this data must demonstrate that they have taken all reasonable efforts to achieve the target. Furthermore, importers must utilise the ‘comments’ section in the CBAM transitional registry to justify their situation and attach evidence of their diligent attempts and measures taken to obtain the necessary data from suppliers and/or manufacturers.
National competent authorities must assess whether registrants have taken the necessary steps to submit complete, accurate and timely CBAM reports. They can consider any justified difficulties faced in acquiring actual emissions data from CBAM goods manufacturers. National competent authorities may impose penalties where the CBAM report is incorrect or incomplete or where the reporting importer fails to include sufficient justification for using reporting rules other than those listed in the implementing regulation. In determining whether to impose penalties, the authorities must consider the specific efforts and resources dedicated by the reporting importer to comply with the rules. This includes unproductive data collection attempts, reminders and follow-ups with non-EU manufacturers. The authorities also will assess the adequacy of these efforts and resources in relation to the importer’s economic size, the total volume of CBAM imports and their associated emissions.
In addition, the European Commission reiterates that for imports after 30 June 2024, the use of default values will be possible only for complex goods and up to 20% of the total incorporated emissions. Global default values will only refer to the Combined Nomenclature Code, while during the definitive phase of CBAM, default values referring to individual countries/regions of origin of the goods will be made available based on data collected during the transitional period.
The complexity in tracing production-related emissions data for CBAM goods is often linked to the complexity of business operations in which different traders and collectors of export goods are involved, lacking a direct relationship between the importer and producer.
BDO insight
What emerges from the above is that importers need to have processes in place to enable the traceability of goods and actions taken with their non-European suppliers to obtain the necessary data to comply with the EU CBAM rules. Given the dynamic nature of this regime, a proactive approach to CBAM management is crucial for entities subject to these obligations.Guido Calderaro
Paola Levato
BDO in Italy