Sustainability  Law 

Carbon tax approved: new obligations for importers

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods entering the EU, and to encourage cleaner industrial production in non-EU countries. The gradual introduction of CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry. How to prepare for the new regulation? When will the regulation come into effect? And what are the penalties for infringements of CBAM?

Latest developments

On 17 May 2023, the CBAM Regulation officially entered into force, and it will come into effect in its transitional phase from 1 October 2023 to 31 December 2025. The set of rules and requirements for the reporting of emissions under CBAM will further be specified in an implementing act to be adopted by the Commission after consulting the CBAM Committee, made up of experts from EU Member States.

Key elements of regulation

The CBAM Regulation will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: steel, iron, aluminium, and a wide range of products made from these metals, cement, fertilizers, electricity, and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors.

The gradual phasing in of CBAM over time will allow for a careful, predictable, and proportionate transition for EU and non-EU businesses, as well as for public authorities. During this period, importers of goods from third countries into the EU in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments.

The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime. The objective of this transitional period is to serve as a pilot and learning period for all stakeholders (importers, producers, and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.

Mechanism after its full launch

Once the definitive system becomes fully operational on 1 January 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. 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 ETS allowances expressed in €/tonne of CO2 emitted. The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026-2034.

A review of the CBAM’s functioning during its transitional phase will be concluded before the entry into force of the definitive system. At the same time, the product scope will be reviewed 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. The report will include a timetable setting out their inclusion by 2030.

Penalties for infringements of the CBAM Regulation

According to the CBAM Regulation, Member States should impose penalties for infringements of this regulation and ensure that they are enforced. More specifically, the penalty amount for the failure to surrender CBAM certificates by an authorised CBAM declarant should be the same as the amount according to the Directive establishing a scheme for greenhouse gas emission allowance trading.

According to the CBAM Regulation and in connection with penalty rules according to the above-stated directive, every authorised CBAM declarant who fails to surrender, by 31 May of each year, a number of CBAM certificates corresponding to the emissions embedded in goods imported during the previous calendar year, is liable for the payment of a penalty for each tonne of emissions not covered by CBAM certificates. We expect that in the first three years after the implementation of the CBAM mechanism (we anticipate that from 1 January 2026) the penalty should amount to EUR 40, and, in the next period, the amount of the penalty should increase to EUR 100. The payment of the penalty shall not release the authorised CBAM declarant from the obligation to surrender the outstanding number of CBAM certificates that the authorised CBAM declarant should have surrendered in the relevant year. We believe that these penalties could exceed hundreds of millions of Czech crowns.

However, where goods are imported to the EU by a person other than the authorised CBAM declarant, without complying with the obligations under the CBAM Regulation, the penalty should be higher in order to be effective, proportionate, and dissuasive, depending in particular on the duration, gravity, scope, intentional nature and repetition of such non-compliance and the level of cooperation of the person concerned with the competent authority. According to the regulation, it should be an amount from three to five times the above-stated penalty (depending on the year of import of goods into the customs territory of the Union) for each CBAM certificate not surrendered by the relevant person.

According to the regulation, the relevant authority may impose penalties already in the transitional period. If an importer or indirect customs representative does not correct the incomplete or incorrect CBAM Report or fails to comply with the obligation to submit the CBAM Report, the competent authority is entitled to impose the proportionate and dissuasive penalty.

How can Deloitte Legal help you?If you are not sure how to prepare for the new regulation, do not hesitate to contact us. We can identify obligations that will apply to you, propose changes to your contractual documentation to comply with the CBAM requirements, or help you prepare reports. For the complete list of our services related to CBAM, please visit our web site (in Czech).

Cooperation of the Commission with third countries and industry

The Commission states that it has consulted widely with stakeholders during the preparation of the CBAM proposal, both through an open public consultation and more focused discussions. In addition, the Commission held extensive bilateral consultations with public authorities in EU and non-EU countries, business associations, individual companies, and NGOs.

The Commission believes that cooperation with industry and partner countries should continue during the transitional period to increase mutual understanding of the CBAM mechanism, ensure its smooth implementation, find synergies, and promote an effective method of decarbonisation at a global level.

This should be reflected in the evaluation of the application of the Regulation to be completed by the Commission by mid-2025 that will also define the final methodology to be used for the launch of CBAM on 1 January 2026.

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