Phase 1 Launches of Carbon-Based Tariffs on Imports into the EU

• October 13, 2023
• Jennifer Clement

On October 1^st, the European Union launched the initial phase of its Carbon Border Adjustment Mechanism (CBAM) that will ultimately result in carbon-based tariffs on imports into the EU.  

In this video from The Franklin Partnership, contributing author Omar Nashashibi explains the new CBAM and not only its impact on U.S. exporters to the EU, but also how this action impacts the U.S. and EU talks later in October on establishing a joint carbon-based tariff system starting with steel and aluminum.

What is required in phase 1?

While the 27-nation bloc will not start collecting the carbon tariff until 2026, this initial phase requires reporting and other steps by a select group of industries. The goal, according to EU policymakers, is to keep higher polluting foreign products from undermining its green transition by equalizing the price of carbon between European Union-based domestic products and foreign imports. 

What goods are targeted?

In its transitional phase, CBAM will only apply to imports of cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. EU importers of those goods will have to report on the volume of their imports and the greenhouse gas emissions embedded during their production, but without paying any financial tariffs during this stage. The new rule requires importers to collect data for the fourth quarter of 2023 with their first report due by January 31, 2024. 

How will goods be reported?

To help EU importers and others with implementation of the rules, the EU created a new CBAM transitional registry starting October 1^st to assist importers in reporting the calculations. Importers request access to the registry through the National Competent Authority of the Member State to which the import is destined.

Over the course of the rest of this year, the European Commission will gradually make available additional written guidance and training materials, along with sector specific fact sheets.

For the first year of application, there are some flexibilities built in, including the use of default values for reporting of embedded emissions and the possibility to use the monitoring, reporting and verification rules of the country of production.

Three Options for Reporting

Until the end of 2024, companies will have the choice of reporting in three ways:

1. Full reporting according to the new methodology known as the “EU method.”

2. Reporting based on an equivalent method.

3. Reporting based on default reference values, but that is only until July of 2024.

As of January 1^st, 2025, only the EU method will be accepted and importers can only use estimates, including default values, for complex goods if these estimations represent less than 20% of the total embedded emissions. The European Commission will publish default values by the end of 2023, ahead of the January 31^st 2024 deadline for the reports importers need to submit. 

CBAM Certificates Start in 2026

Starting 2026, importers will need to buy and surrender the number of “CBAM certificates” corresponding to the Greenhouse Gas Emissions embedded in imported CBAM goods.

Once the permanent system enters into force on January 1^st, 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded greenhouse gas emission. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU Emissions Trading System, or ETS allowances, which is calculated as Euros divided by tonnage of carbon dioxide emitted.

EU Emissions Trading System (ETS) to be phased out

The EU will phase out its ETS in parallel with the phasing-in of the CBAM over the period 2026-2034. During this time, the EU will review the scope of the covered goods to assess the feasibility of including other goods produced in sectors covered by the EU ETS in the scope of the CBAM mechanism, such as certain downstream products and those identified as suitable candidates during negotiations, this could include plastics and a number of other products. We are also hearing that we should expect a report in the next few years on a timetable setting out inclusion by 2030 of additional imports beyond those initial goods of cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.

Watching Washington

The October 1^st start of the CBAM in the EU is important on many levels – for those exporting products into the 27-nation bloc, but also for those of us watching here in Washington what policymakers might do. The Biden administration is negotiating with the EU a steel and aluminum carbon tariff system would apply a tariff on carbon intense steel or aluminum imported into either the U.S. or EU.

On October 20^th, President Biden will host the head of the European Commission at the White House where they will likely provide an update on progress on a carbon-based tariff and also possibly on an interim tariff on excess steel that would take effect as Washington and Brussels work towards a carbon-system to tariff imports. A main holdup to the talks is how the CBAM will treat imports from the U.S., since, as of October 1, 2023, shipments from those select categories coming from the U.S. to the EU are subject to reporting requirements.

A World First

This is the world’s first carbon-based tariff and reporting system on such as large scale that we have seen. And with this will come some challenges and learning curves along the way. We will be on the lookout for additional guidance from the EU and report on the October 20^th U.S.-EU meeting. In the interim, please reach out to CLA for more information as businesses continue to navigate how governments around the world are regulating carbon emissions through tariffs on goods.

Need help exploring the economic impact on your business?  Let’s talk.

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