The Carbon Border Adjustment Mechanism (CBAM) is a significant regulatory framework introduced by the European Union (EU) to address carbon emissions associated with imported goods. As the world moves towards a more sustainable future, understanding CBAM is crucial for companies, especially those in Asia that export to the EU. This guide provides a comprehensive overview of CBAM, its implications, and how Asian companies can prepare for its implementation.

Overview of Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is part of the EU’s broader strategy to reduce greenhouse gas emissions and combat climate change. It aims to prevent “carbon leakage,” which occurs when companies move production to countries with less stringent climate regulations to avoid carbon costs. This would undermine the EU’s efforts to cut emissions domestically. By imposing a carbon price on certain imported goods, CBAM encourages foreign manufacturers to adopt greener practices and helps ensure that products sold within the EU face comparable carbon costs, regardless of their origin.

Key Features of CBAM:

• Targeted Sectors: Initially, the CBAM regulation focuses on high-emission sectors such as iron and steel, cement, fertilizers, aluminum, and electricity. These sectors are critical since they contribute significantly to global emissions. These industries are highly carbon-intensive, making them the first to be subject to the EU’s carbon border adjustment mechanism (CBAM).
• Transition Period: The mechanism entered a transitional phase on October 1, 2023, where importers are required to report embedded emissions without facing financial penalties. This period gives businesses time to adapt and develop robust carbon reporting systems. The full enforcement begins on January 1, 2026, at which point importers will need to purchase CBAM certificates based on their reported emissions.
• Reporting Requirements: Companies are required to report both direct and indirect emissions associated with their products. This involves calculating the carbon footprint of goods throughout the entire production and supply chain, ensuring that all emissions, from raw material extraction to final product shipment, are accounted for.

This CBAM (Carbon Border Adjustment Mechanism) explained policy represents an essential move toward reducing global emissions. It sets a standard that may be adopted by other countries to regulate carbon emissions in trade.

What is CBAM?

What is Carbon Border Adjustment Mechanism (CBAM)? To the CBAM explained simply, the CBAM is a tariff system designed to put a price on carbon emissions embedded in imported goods. It ensures that EU producers, already subject to stringent carbon pricing through the EU’s Emissions Trading System (ETS), are not at a competitive disadvantage compared to foreign manufacturers who may operate under more lenient environmental regulations.

What is CBAM aimed at? CBAM seeks to ensure that imported goods entering the EU market bear the same carbon cost as locally produced goods, which are subject to the EU ETS. By imposing a CBAM carbon price, the EU hopes to drive global producers toward more environmentally sustainable practices, reducing the risk of cross-border carbon adjustment becoming an excuse to evade responsibility for emissions.

Why Does CBAM Matter?

The Carbon Border Adjustment Mechanism regulation matters for several reasons. The EU is one of the largest markets in the world, and policies like CBAM will influence trade practices globally. Many companies around the world, especially in Asia, export carbon-intensive goods such as steel, aluminum, and cement to the EU. The CBAM EU policy affects not only exporters but also industries and supply chains indirectly connected to the EU market. Non-compliance could lead to higher costs, penalties, and reduced market competitiveness.

Moreover, CBAM EU Commission officials have emphasized that the CBAM is not merely a protective measure for EU industries. Instead, it is a global call to action for industries to rethink their production processes, innovate in green technologies, and ultimately contribute to a global reduction in carbon emissions.

How Does CBAM Operate?

CBAM operates by imposing a price on the carbon emissions of imported goods. Essentially, if goods are produced in countries with less stringent carbon pricing, importers are required to compensate for the carbon disparity by purchasing CBAM certificates that correspond to the carbon emissions generated during the production of those goods.

Step-by-Step Breakdown of CBAM:

• Calculating Carbon Content: When goods are imported into the EU, their carbon content is measured. This includes direct emissions during the production process and indirect emissions from energy consumption. Companies will need to calculate and report these emissions with accuracy.
• Assessing Carbon Costs: Importers must then assess how much of the carbon emissions have already been priced in the exporting country. If the exporting country does not impose a carbon price, or if the price is lower than that of the EU, the importer must purchase CBAM carbon border adjustment certificates to cover the difference.
• Reporting and Verification: CBAM requires importers to submit verified emissions data for their goods. This is a critical compliance aspect, ensuring transparency and accuracy in carbon accounting. Non-compliance or underreporting can lead to penalties and delays at EU borders.
• Purchasing CBAM Certificates: After verification, importers must purchase CBAM certificates corresponding to the carbon emissions that were not accounted for in the exporting country. These certificates act as a fee for the carbon embedded in imported goods.

CBAM (Carbon Border Adjustment Mechanism) Sectors:

The EU carbon border adjustment mechanism initially targets the sectors most at risk of carbon leakage, namely:

• Steel
• Aluminum
• Cement
• Fertilizers
• Electricity

As the mechanism expands, more sectors will likely be added. This would depend on the success of the first phase and the EU’s evaluation of other industries contributing significantly to global emissions.

The Impact of CBAM on Asian Companies

The introduction of the CBAM carbon border adjustment system is expected to have far-reaching consequences for Asian companies, especially those that rely heavily on exports to the EU. It introduces new layers of complexity and cost, which could disrupt traditional trade dynamics between Asia and Europe.

What are the Challenges for Asian Companies?

• Compliance Costs: The cost of complying with the CBAM EU can be substantial for businesses, especially those that operate in countries with less stringent environmental regulations. Companies may need to invest heavily in carbon accounting systems, conduct emissions audits, and purchase CBAM certificates to continue exporting to the EU without facing penalties.
• Supply Chain Disruptions: Ensuring full compliance with CBAM regulation could lead to supply chain delays, as companies may struggle to provide the necessary emissions reports or face higher costs if they fail to meet the required standards.
• Competitive Disadvantage: Asian companies that are slow to adapt to CBAM regulations might lose market share to competitors that have already implemented greener production methods and are better equipped to handle the associated costs.

What are the Challenges for Asian Companies?

• Innovation and Efficiency: On the positive side, the pressure to comply with CBAM can drive innovation. Companies may be pushed to adopt cleaner, more energy-efficient production technologies, improving their long-term competitiveness.
• Market Differentiation: Those companies that successfully transition to low-carbon production can differentiate themselves in the marketplace, gaining a competitive advantage in the increasingly sustainability-conscious EU market.
• Access to Green Financing: With the growing focus on environmental sustainability, businesses that proactively adopt green practices might benefit from improved access to financing through sustainability-linked loans or green bonds. Investors are increasingly drawn to companies with strong environmental practices, viewing them as less risky.

How Can Asian Companies Prepare for CBAM?

The CBAM transitional period is an opportunity for Asian companies to prepare. Early preparation will allow them to avoid the significant penalties and competitive disadvantages that could arise from non-compliance.

1. Understand Reporting Requirements

Companies must first understand the carbon border adjustment mechanism (CBAM) regulations. This includes:

• Identify the scope of emissions from their operations.
• Accurately track emissions across the entire production and supply chain, covering both direct emissions (Scope 1) and indirect emissions (Scope 2).

2. Invest in Carbon Accounting Systems

Investing in reliable carbon accounting systems is important for compliance with CBAM EU commission guidelines. These systems will enable companies to:

• Measure, track, and report emissions data effectively.
• Integrate carbon accounting into their broader enterprise systems, ensuring that carbon-related data is transparent and traceable.

3. Engage Stakeholders

Successful CBAM compliance requires collaboration between departments. For example:

• Understand the financial implications of CBAM carbon border adjustment certificates and manage the cost of compliance.
• Ensure that suppliers adhere to emissions standards, reducing overall carbon footprints.

4. Improve Supply Chain Transparency

Companies should improve the transparency of their supply chains to manage carbon footprints better. This includes:

• Map supply chains to identify emissions hotspots.
• Work with suppliers who prioritize sustainability to ensure alignment with CBAM standards.

5. Adopt Sustainable Practices

Asian companies can reduce their carbon exposure and CBAM compliance costs by adopting sustainable production practices. Some strategies include:

• Invest in renewable energy sources, such as solar power or wind.
• Improve energy efficiency across operations to reduce emissions.

6. Monitor Regulatory Developments

Companies must stay informed about changes in Carbon Border Adjustment Mechanism regulations and similar mechanisms worldwide. This will allow them to stay ahead of potential policy changes that could impact their operations.

The Carbon Border Adjustment Mechanism (CBAM) is set to change the landscape of international trade by making carbon a key consideration in global markets. By understanding the carbon border adjustment mechanism explained, investing in carbon accounting, collaborating with suppliers, and adopting sustainable practices, companies can comply with regulations while positioning themselves for long-term success in a low-carbon global economy.

BECIS offers integrated sustainability solutions through our Environmental, Social, and Governance (ESG) practices and Energy-as-a-Service (EaaS) solutions. This can significantly assist companies in meeting the Carbon Border Adjustment Mechanism (CBAM) requirements. By providing energy-efficient technologies such as renewable energy systems, cooling solutions, and biogas, BECIS helps businesses reduce their carbon footprint across the entire supply chain. Our ESG strategies emphasize compliance with environmental regulations, ensuring that companies meet carbon reporting and reduction targets, which are critical for CBAM compliance.

In addition to helping companies lower their direct emissions, BECIS’s EaaS solutions also provide businesses with flexible and scalable energy systems that reduce operational carbon intensity. These services help companies meet the EU’s stringent CBAM requirements and also prepare them for future regulatory expansions by improving overall energy efficiency and sustainability. So your businesses are easier to report and minimize carbon emissions embedded in exported goods. Take the next step toward sustainability today—partner with BECIS to stay ahead of the evolving carbon regulations and ensure long-term compliance and success.

References

https://www.climatiq.io/data/source/cbam https://www.carbonchain.com/cbam https://www.krungsri.com/en/research/research-intelligence/cbam-2023 https://trade.ec.europa.eu/access-to-markets/en/news/carbon-border-adjustment-mechanism-cbam https://www.internationaltaxreview.com/article/2ckxbui6dw5k09xli1a80/sponsored/why-asia-pacific-tax-departments-need-to-prepare-for-the-eus-cbam https://www.deloitte.com/nl/en/services/tax/perspectives/eu-carbon-border-adjustment-mechanism-cbam.html https://www.ey.com/en_pl/tax/how-tax-departments-should-prepare-for-cbam