CBAM: Your Guide to the New Era of Carbon Accountability

The EU's new Carbon Border Adjustment Mechanism (CBAM) is set to reshape global trade and supply chains, impacting both European importers and their suppliers worldwide.

Is your business prepared for the EU's new carbon tax? The Carbon Border Adjustment Mechanism (CBAM) is set to transform the global trade and supply chains, impacting European importers and non-European suppliers alike. Whether you're an importer, a manufacturer, or a consultant guiding clients through the transition - this guide is designed to provide you with the essential knowledge to succeed.

My personal interest in the CBAM was sparked during my master's studies at Lund University, where I collaborated with technical engineer Cecilia Liljeberg to explore how AI technologies could simplify CBAM reporting for both manufacturers and importers. Later in this post, I'll delve into our findings, particularly relating to the complexities which suppliers face, when asked to provide accurate emissions data to their European buyers come 2026.

What is CBAM?

The CBAM is a climate policy introduced by the European Union, essentially a carbon tariff on imported goods. It aims to create a fair competition between European and non-European producers by putting a price tag on the carbon emissions associated with imported products. This price is based on the carbon price within the EU's own Emissions Trading System (ETS) which we shall revisit later in the post. In short, one could argue that what the CBAM does in practice, is it extends European sustainability standards to non-European suppliers. 

To illustrate the significance of the CBAM from an environmental perspective, consider the steel industry, which alone accounts for a staggering 7-9% of global emissions—equivalent to the combined emissions of all cars in Europe. Due to its high carbon footprint, steel, along with cement, aluminum, fertilizers, and other carbon-intensive goods, have been designated as "CBAM goods", affecting suppliers and importers alike.

Understanding the carbon impact of "CBAM goods" is important, because businesses dealing with these goods have been known to relocate production outside the EU to circumvent stricter environmental regulations, a phenomenon known as carbon leakage. As we are collectively advancing towards the implementation of the CBAM, businesses are faced with the consequences of their emissions, and it is their suppliers who will need to adopt more sustainable practices.

What’s the different between CBAM and ETS?

While both the CBAM and the EU ETS aim to reduce carbon emissions, their mechanisms differ significantly. Let's delve deeper into how each policy works, including their scope and target.

• Scope: The ETS is an environmental policy tool where a limit is set on overall emissions, and companies can buy and sell permits to emit pollutants, incentivizing them to reduce emissions for financial gain. ETS applies to emissions from installations within the EU, while CBAM applies to imported goods from outside EU.
  

• Mechanism: The ETS and the CBAM are two mechanisms working in tandem to nudge companies to take accountability for their carbon emissions. The CBAM imposes a fee on imported goods based on their embedded carbon emissions, ensuring that products produced outside the EU with less stringent environmental standards don't have an unfair advantage. Starting in 2026, importers in the EU will be required to purchase CBAM certificates that correspond to the amount of emissions generated during the production of goods outside the EU. In Sweden, the Swedish Environmental Protection Agency (Naturvårdsverket) will administer these certificates. As a preparatory step, importers have been required since October 2023 to report the emissions of their imported goods, paving the way for the full implementation of this stricter regulation in 2026.
  

• Target: The ETS aims to reduce emissions within the EU, while CBAM aims to prevent carbon leakage and encourage global decarbonization.
  

Calculation of Emissions and Default vs. Actual Values

Now, let's address the aspect of CBAM that most businesses and their suppliers are most likely to find challenging: calculating embedded emissions. Currently, in the transitional phase (as of 2024), businesses are asked to use EU's default emission values set by the EU as previously mentioned. These values may not accurately reflect the actual emissions associated with a specific product. The upcoming definitive phase will ask of importers to switch to actual emission values, a move that could significantly lower CBAM costs for the importers. This requires suppliers to obtain verified emissions data—a complex and potentially expensive undertaking if not tackled early on.

This is where my research comes in as mentioned in the beginning. Me and my research partner explored how artificial intelligence (AI) could be a game-changer in helping suppliers determine accurate emissions data during this transition. Imagine the possibilities: AI-powered tools could streamline tracking and analysis, even going as far as ear tagging individual batches of "CBAM goods" exported, for precise measurement.

Our research uncovered a significant challenge: while AI offers immense potential for improving emissions tracking, current cross-border data-sharing obstacles hinder its full implementation. This lack of transparency adds complexity to the CBAM landscape. While suppliers could theoretically use AI to improve reporting in their end, the question remains: how accurate, transparent and verifiable will this data be in practice? If you are interested in reading the full paper, you can find it below among the resources.

Despite this transparency challenge—one that can likely be overcome through strong collaboration and data-sharing agreements between suppliers and importers—the CBAM represents a pivotal move towards greater carbon accountability. Overall, it signals a shift towards a more transparent and responsible global supply chain, leading to more accurate emissions tracking, informed decision-making, and ultimately, more effective climate action.

Expecting higher prices on CBAM goods

As we’ve learned so far, the CBAM is not just another regulatory hurdle; it's a game-changer with far-reaching consequences for businesses involved in the trade of carbon-intensive goods. Here are a few effects to expect the coming years, as the mechanisms are set in place:

- Financial Impact

The CBAM will have a direct financial impact on businesses importing goods into the EU. These companies will need to factor in the cost of CBAM certificates. This added expense could significantly impact their pricing bottom line.

Furthermore, the effects of CBAM may reach beyond direct importers. Even if your business doesn't import goods into the EU, you might still feel the impact as an indirect consumer. If your suppliers or customers import CBAM goods, they may pass some of these increased costs onto you. Therefore, it's crucial for businesses to understand how the CBAM might influence their operations, both directly and indirectly.

- Shifting Global Sourcing Patterns

CBAM is set to transform global supply chains. As the the cost of importing carbon-intensive goods increases, businesses will face a choice: either pressure their existing suppliers to invest in cleaner production methods or seek out alternative suppliers, possibly bringing production back to the EU. Different businesses will adapt in different ways, but CBAM will undoubtedly shift global sourcing patterns and open doors for companies offering low-carbon alternatives.

- Compliance Risks and Penalties

Failure to comply with reporting and payment obligations could result in significant penalties from the national CBAM administrator. These could include financial fines, delays in customs clearance, and potential reputational damage. Understanding and preparing for CBAM compliance is essential to mitigate these risks, which is exactly what you are doing, if you have red this far! 

- Staying Ahead of the Curve

CBAM is just the beginning of a global trend towards stricter carbon pricing and environmental regulations. By understanding and adapting to CBAM, businesses are on a good bath to gain a competitive advantage, demonstrate their commitment to sustainability, and position themselves for success in a low-carbon future.

Wrapping it all up: How Should Businesses Prepare for CBAM?

Proactive preparation is key to minimizing the impact of CBAM on your business. Here are five steps I suggest you can take:

1. Calculate Your Company's Carbon Footprint: Begin with thoroughly assess your company's carbon footprint, including both direct emissions (Scope 1) and indirect emissions from purchased energy (Scope 2). This will help you understand your baseline emissions and identify areas for improvement, whether you are directly affected by CBAM or not.
   

2. Map Your Supply Chain Emissions: Secondarily, gain visibility into your supply chain emissions (Scope 3). Engage with your suppliers to gather data on the embedded emissions of the goods you import. Pay particular attention to whether any part of you business imports CBAM goods; cement, iron and steel, aluminium, fertilisers, electricity or hydrogen.
   

3. If you find that you are subject to CBAM: in Cleaner Technologies: Continuing on the proactive track; explore opportunities to reduce your carbon footprint by investing in cleaner technologies and production processes. This could involve switching to renewable energy sources, improving energy efficiency, or adopting low-carbon materials. Depending on your business area you may also consider initiatives to increase biodiversity in your local area, which often goes hand-in-hand with carbon reducing efforts.
   

4. Stay Informed: Keep up-to-date with the latest CBAM developments, guidelines, and reporting requirements. The EU is constantly refining the mechanism, so staying informed is crucial. If your base is in Sweden, then the Swedish Environmental Protection Agency (Naturvårdsverket) will be a good source of information.
   

5. Seek Expert Guidance: Don't hesitate to seek help from experts in carbon accounting, sustainability consulting, or legal compliance. They can help you assess your CBAM exposure, develop a comprehensive compliance strategy, and navigate the complexities of the mechanism.
   

By taking these proactive steps, you can both prepare for CBAM compliance as well ass gain a competitive advantage in the emerging low-carbon economy. Remember, CBAM is not just a regulatory challenge; it's an opportunity to transform your business for a more sustainable future. Best wishes on your journey and don't hesitate to reach out if you have questions about the CBAM.

Resources and Tools:

• The European Commission's CBAM website: This official source provides the latest information on CBAM legislation, guidelines, and reporting requirements.
  

• Naturvårdsverkets hemsida: https://www.naturvardsverket.se/om-oss/aktuellt/nyheter-och-pressmeddelanden/2023/september/naturvardsverket-far-cbam-ansvaret-i-sverige/
  

• Carbon accounting software: Various software solutions can help you calculate your carbon footprint and track your progress in reducing emissions. My personal favourites for mid sized businesses is Coolset and Position Green.