Carbon tax. How to prepare for the Carbon Border Adjustment Mechanism (CBAM)?

Carbon tax. How to prepare for the Carbon Border Adjustment Mechanism (CBAM)?
Jakub Chajdas

Jakub Chajdas

Partner / Attorney-at-law

The carbon border adjustment mechanism (CBAM) is an innovative solution. It aims at reducing global carbon dioxide emissions. Learn how CBAM works, what its legal basis and objectives are, and what it means for businesses in the European Union.

carbon tax

Carbon tax (CBAM) – definition

The Border Carbon Adjustment Mechanism (CBAM) was introduced by the European Union. It is a solution to fight global climate change. It is also known as a carbon tax. It defines a new method for determining customs duties at the EU borders, taking into account carbon dioxide emissions. It covers energy-intensive industry products imported into the EU from third countries.

Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 is the legal basis for the carbon tax. Its goal is to regulate the prices of goods imported into the customs territory of the EU. It also takes into account the carbon emissions associated with it.

The European Commission published Regulation (EU) 2023/1773 of 17 August 2023 on the 15 of September 2023. It specifies the reporting obligations related to the CBAM tax.

What is important, the CBAM tax is one of the 3 pillars of the EU’s climate neutrality plan. The whole project is to be implemented by 2050.

Carbon tax (CBAM) – the purpose of introduction

The goal of the CBAM tax is to limit the import of certain goods into the European Union. This refers to countries where reducing greenhouse gas emissions and carbon dioxide is not considered. The regulations stipulate that importers will eventually be subject to extra charges. They will be calculated based on the amount of emissions permits.

Carbon tax (CBAM) – the scope

New regulatory obligations will concern the following goods covered by the CBAM mechanism:

  • Cement,
  • Iron and Steel,
  • Aluminium,
  • Fertilisers,
  • Hydrogen,
  • Electricity

The EU may expand this list in the future, for example, to include plastic products.

carbon tax

Do you have questions about the carbon tax?

If you are one of the importers of goods subject to CBAM, our experts can help you. We will explain how to prepare for the full implementation procedure. Contact us today!

How and when to implement the Carbon tax (CBAM)?

The European Commission’s website provides information about the procedure. It states that the implementation of the CBAM regulation has two stages.

Transitional periodFinal period
from 1 October 2023 to 31 December 2025from 1 January 2026
It functions as a pilot and learning period for all the involved parties (importers, producers, and authorities). It also allows for the collection of useful information on embedded emissions. This serves to refine the methodology for the final period. During this time, importers subject to the CBAM tax must submit quarterly reports. They must prove the scale of emissions of goods introduced into the European market. They must also indicate the volume of imports.This will entail obligations such as:
– obtaining “authorised CBAM declarant” status for importers of goods under the CBAM mechanism into the EU,
– the yearly report on imported goods and the related greenhouse gas emissions for the previous year,
– settling these emissions with dedicated CBAM certificates.
Stages of CBAM regulations implementation

Carbon tax (CBAM) – when does it start?

As of 1 October 2023, the transitional period for the CBAM regulation began. It will last until 31 December 2025. Its full implementation is scheduled for 2026.

From 1 January 2026, importers of goods subject to CBAM will have to:

  • have the status of “authorised CBAM declarant,”
  • buy CBAM certificates corresponding to the emissions embedded in the imported goods.

After the transitional period, importers will have to submit an annual carbon tax report under the CBAM regulation. The deadline for this is 31 May.

Which goods will be subject to annual CBAM reporting? It concerns goods associated with the highest risk of “emission leakage”. It occurs when European companies move production to countries with less strict carbon emission regulations.

carbon tax

Consequences of non-implementation of CBAM

Entrepreneurs who fail to fulfil CBAM obligations properly may expect fines and sanctions. They will range from 10€ to 50€ per ton of unreported imported goods.

Entrepreneurs may also be penalized by revoking the authorized CBAM declarant status.

To avoid these consequences, make sure that the CBAM report is submitted correctly and on time.

Carbon tax (CBAM) – summary

The CBAM tax is a tool aimed at fighting the “emission leakage,” i.e. the relocation of production to countries with lower environmental standards. The introduction of this tax is of great importance to the EU’s climate policy. However, it also raises many controversies and questions.

If you find the above topic interesting and want to know more about it, do not hesitate to contact us. Experts from our law firm are ready to help you!

FAQ – questions and answers on the Carbon tax (CBAM)

What is the carbon tax (CBAM)?

CBAM is a tax system aimed at reducing carbon dioxide emissions by controlling products imported into the EU.

Why was the carbon tax (CBAM) introduced?

It was introduced to fight the “emission leakage”. Its goal is to prevent the relocation of production to countries with lower environmental standards. It also aims to strengthen global efforts to protect the climate.

How does carbon tax (CBAM) work?

This mechanism involves imposing taxes on imported products based on their carbon footprint. This levels the playing field between EU and non-EU companies.

Does carbon tax (CBAM) apply to all industry sectors?

Currently, CBAM mainly applies to high-emission sectors. This includes e.g. steel, aluminium, cement, fertilizers, and electricity. But it may eventually cover other sectors as well.

How does carbon tax (CBAM) affect businesses?

Companies importing into the EU must pay a tax based on the carbon footprint of their products. This may lead to higher costs and a change in production strategy.

Will the CBAM tax contribute to reducing carbon dioxide emissions?

The main goal of CBAM is to encourage companies to reduce emissions. This is pursued by introducing economic incentives to use cleaner technologies.

What are the controversies surrounding carbon tax (CBAM)?

Critics argue that this tax may lead to trade tensions and discrimination against non-EU firms. Especially those from developing countries.

Will carbon tax (CBAM) impact consumers?

The tax may result in higher costs for imported goods. This may lead to higher prices for consumers.

What are the alternatives to carbon tax (CBAM)?

Alternative approaches include international agreements on emission reduction or the introduction of other tax mechanisms at a global level.

When will the carbon tax (CBAM) come into effect?

The first phase of CBAM is planned for 2023. The full implementation of the mechanism is expected by 2026.

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