The Carbon Border Adjustment Mechanism (CBAM), part of the EU’s Fit for 55 package, effectively puts a price on greenhouse gas emissions embedded in the production of certain imports.
The mechanism aims to prevent “carbon leakage” and ensure that imports from countries with weaker carbon policies do not undermine products from the EU, where manufacturers pay for their emissions under the bloc’s emissions trading system.
Carbon leakage refers to relocating GHG-emitting industries to jurisdictions with less stringent carbon pricing regulations, particularly to countries more open to trade.
The CBAM initially targets six sectors: cement, iron and steel, electricity, aluminum, fertilizers and hydrogen, though the EU is already planning to expand the coverage to include all products under the union’s emissions trading system (ETS).
How Does the CBAM Work?
For now, CBAM importers face reporting obligations. These include country of origin of goods imported, quantity and embedded emissions (total, direct and indirect). For the first quarterly reports, meaning 2023 through 2024, they can use default values to report on the emissions. After that time, CBAM-relevant data must be based on actual values collected from suppliers or manufacturers.
Starting from January 2026, CBAM declarants must also surrender or purchase CBAM certificates based on the emissions embedded in the imported goods. The cost of these will be pegged to the EU’s ETS weekly market price.
Supply Chain Implications
Carbon border adjustment means that procurement professionals will need to intimately understand the embedded emissions in their imported products (including sources within Scope 3 boundaries), as it directly affects costs and disclosure burdens.
Supplier emissions data will directly impact product pricing. The CBAM will likely drive up the prices of goods within its scope and influence buying decisions. Demand may shift away from higher-emissions products, while suppliers working to find carbon efficiencies may gain a competitive position in a low-carbon demanding economy.
Policy Interests
Also, the prospects of more aggressive carbon pricing mechanisms in other jurisdictions are increasing. Other CBAMs could be launched elsewhere in the world – several countries such as the US, UK, Canada, India and Japan have already indicated an intention to implement their equivalents, further dissuading potential buyers from carbon-intensive products.
Multiple factors likely drive broader adoption of carbon border adjustment. Some countries’ support primarily comes from their climate capacity and policies. Others are driven by preserving competitiveness for their domestic markets or industries.
Either way, many organizations in said countries have been skeptical of carbon tax initiatives. Compliance with the CBAM is already complex, involving arduous emissions measuring and reporting. Suppose multiple regimes demand all this on different terms and against different timelines or reporting requirements. In that case, the result will be a drag on importers and suppliers alike.
Carbon Adjustment: Rethink Supplier Engagement
€100 a tonne of carbon dioxide by 2026 is increasingly probable, with overlapping and incompatible policies incentivizing emissions licensing and control. In the meantime, companies can get ahead of the effects on global carbon markets by taking seriously the range of options for decarbonization.
How can we help?
With Ecovadis Carbon Action Manager, you work closely with your suppliers to provide comfort over their emissions data and build their carbon capabilities to ramp up the delivery of ambitious climate action. Contact us today to learn more about how the Carbon Action Manager can support your business.
About the Author
Follow on Twitter Follow on Linkedin Visit Website More Content by EcoVadis EN
