Aleix Santalla
What is it?
The Carbon Border Adjustment Mechanism (CBAM) is a tool developed by the EU to establish a fair price for materials intensive in carbon that enter the EU.
How does it work?
Production companies purchasing cement, iron, steel, aluminium, fertilizers, electricity, and hydrogen, and selling their final products in the EU, will be required to report direct and indirect emissions (scope 1 & 2) generated during the creation of these supplies. Suppliers must provide importing companies with information about the pollution generated during the creation of these materials.
When will it be applied?
From 1/10/2023 until 2026, there is a probationary period during which companies must submit quarterly reports calculating their CO2 emissions. During this period, companies are allowed to learn how to calculate their emissions according to CBAM standards; hence, no penalties or audits will be imposed. Starting in 2026, companies subject to the regulation will undergo audits and will be legally obligated to report their emissions and purchase certificates in advance for every tonne of CO2.
Which regions will be affected?
Companies importing these materials from outside the EU will be subject to CBAM. Additionally, companies within the EU producing these materials must adhere to the EU ETS. The free allowance will begin its phasing out process in coordination with CBAM.
Implications and consequences
According to Michel Barnard, the prices of electricity, cement, and other materials will significantly increase due to the impact of these new measures. This increase will incentivize new initiatives to reduce the usage of these supplies, such as carbon fibber reinforced concrete.
Since the tax will be paid by the company receiving imports, the amount will depend on the supplier's level of pollution. Consequently, we can expect changes in the supply chain as companies seek to minimize their tax burden. This incentive will drive suppliers to find ways to reduce CO2 emissions to avoid being replaced by a less polluting supplier.
Companies operating with low working capital and affected by this measure should exercise caution since certificates must be purchased in advance at the beginning of the year.
Companies may struggle to calculate their emissions due to lack of experience and the complexity of the provided guidelines. Therefore, there will be ample job opportunities in reporting. Furthermore, CBAM will require audit teams to verify companies' compliance with the law. Reporting companies will also need audit personnel to ensure the reliability of information provided by suppliers.
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