What is the EU CBAM?
Over the past few months, a number of my US clients that export to countries in the European Union (EU) have sought my help in getting clarity regarding the new EU Carbon Border Adjustment Mechanism (CBAM). This surge in client inquiries stems from their EU-based customers requiring that these American companies provide documentation showing their products’ embedded carbon emissions data as a prerequisite for completing the sale of their products.
For US companies eyeing or already engaged in exports to the EU, understanding the implications of the EU’s Carbon Border Adjustment Mechanism (CBAM) is crucial to doing business in the EU. This article aims to provide US manufacturers and exporters with useful insights on this new law.
The Products Covered by CBAM
CBAM seeks to prevent non-EU based companies that manufacture products in the EU from relocating their manufacturing operations to regions with lax environmental regulations. By imposing a carbon price on certain imported goods, CBAM aligns production costs with the carbon content of imported items.
The EU’s CBAM became effective in May of 2023, but its transitional phase will run through January 1, 2026. During this transitional phase, importers of specific classes of products into the EU must report the embedded carbon emissions data of the products they bring into the EU. The identified products that currently covered under CBAM include:
- Certain iron and steel goods and certain goods
- Aluminum and goods made of aluminum
- Iron ore and hydrogen
- Some fertilizers
- Electricity
- Mineral products (cement)
During the transitional phase, no payments under CBAM will be required.
Following the transitional phase, EU importers must declare the previous year’s import volumes and their associated embedded carbon emissions data or risk financial consequences for noncompliance. It is expected that the scope of the covered products will broaden after the transitional period.
CBAM’s Impact on U.S. Manufacturers
CBAM’s impact extends to both EU importers and their foreign suppliers, including US manufacturers and exporters. Though this article focuses on the impact for US manufacturers, it is important to note that the EU CBAM regulation places the responsibility of reporting and potentially paying carbon border taxes on EU importers. These importers are required to collect and submit data on the embedded carbon emissions of the covered goods they bring into the EU. This means US manufacturers must cooperate with their EU customers to ensure they have the data needed to comply with CBAM. In essence, smooth data flow throughout the supply chain is crucial for both US manufacturers and EU importers to navigate the CBAM regulations effectively.
Whereas importers of these class of products into the EU must report the emission data, their foreign suppliers are required to furnish accurate data on their products to facilitate compliance. This entails providing CBAM certificates and other relevant information to enable precise reporting and border tax calculations.
For instance, if a Wisconsin-based manufacturer produces aluminum manhole grates at its foundry and sells them to its Belgian customer who then imports these items into Belgium, the Wisconsin manufacturer must provide data on the embedded carbon emission within the aluminum manhole grates to enable the Belgian importer to meet its reporting requirements mandated by CBAM. The same would hold true if the aluminum manhole grates were sold to an intermediary in the United States, who then resells them to its Belgian customers. Thus, regardless of how many times the aluminum manhole grates changes hands before they are imported into the EU, the EU importer would need the emissions data that has been provided by the Wisconsin manufacturer to comply with CBAM reporting requirements because that data must originate from the original manufacturer.
The Consequences of Not Complying with CBAM
For US manufacturers who also import their products into the EU, failing to comply with CBAM reporting requirements, will result in severe penalties set by each EU member state, with the severity escalating based on the duration of the problem. Even if a US exporter does not import their product into the EU, they will be impacted as sophisticated importers will likely pass their cost of non-compliance via contract to their foreign (i.e. U.S. suppliers), indirectly holding them accountable for their CBAM violations. Thus, failing to facilitate compliance may result in penalties for US suppliers or termination of contracts altogether in scenarios where the issues cannot be rectified.
Ensuring CBAM Compliance
To remain compliant with CBAM, US manufacturers must determine whether their products or the inputs used to produce their products are covered goods, as defined by CBAM. If their products fall within CBAM’s scope, they should prepare reports for each product they produce, describing the embedded carbon content in that product.
If for instance, the Wisconsin manufacturer only produces raw aluminum, which are covered under CBAM, then it would need to produce a report detailing the carbon emission content of the raw aluminum. If on the other hand, it procures raw aluminum from an original manufacturer in China and then uses the raw aluminum to produce aluminum manhole grates, then the Wisconsin manufacturer must obtain the carbon emission data of the raw aluminum from its Chinese supplier.
The above obligation would also apply when the aluminum manhole grates are sold to another US customer before they are subsequently resold to an EU-based customer. Thus, the burden of furnishing CBAM compliant documents persists, whether the Wisconsin manufacturer exports covered raw materials or covered finished goods, even if it does not directly export these items into the EU. This means that the supply and sale contracts between the Wisconsin manufacturers and any of its customers or suppliers need to be updated to include contractual obligations to not only limit its liabilities and indemnities, but also to provide the necessary data to its EU-based customers that shall import the product into the EU. These contracts need to be updated at all levels of the covered item’s supply chain.
CBAM’s Broader Economic and Environmental Implications
Beyond the immediate compliance requirements for US manufacturers, CBAM holds significant broader implications for global economic dynamics and environmental efforts. CBAM will likely increase the cost of goods from countries with less stringent environmental regulations, thus incentivizing businesses to adopt cleaner technologies. Environmentally, by aligning economic incentives with carbon reduction goals, the CBAM supports the EU’s ambitious climate targets and contributes to global efforts to combat climate change.
Conclusion
CBAM underscores the importance of environmental compliance in international trade. US manufacturers and exporters to the EU must proactively engage with CBAM requirements to mitigate risks to their business, and to foster sustainable business relationships with their EU customers.
