Blurring the lines: shippers need to be aware CBAM will impact EU imports
The effect of the introduction of the transitional period for the EU’s CBAM scheme on 1 October will be felt most keenly in the commodity carbon steel and aluminium markets, which will see reporting requirements imposed on 350 semi-finished and finished products and 58 products respectively. The breakbulk market has been preparing for the introduction of these rules for some time, and the immediate impacts will be localised.
The scheme is expected to introduce significant bureaucratic reporting requirements for importers of the products, even before the financial penalties for the scheme are introduced in 2026.
Despite fears of trade diversion, commodity market analysts expect the initial impact of the EU CBAM will be to subtly alter the purchasing behaviour of EU importers reliant on low-cost inputs, introducing additional reporting burdens for irregular or opportunistic purchasing during the initial running-in period.
While media comment has understandably focused initially on the financial implications of higher import taxes, and their expected pass through into certain commodity prices, the longer-term impact of the rules will be felt in creating an entire new set of supplier emission monitoring obligations for European importers which will also affect long-term supply relationships.
The introduction of environmental emissions submission requirements, and the subsequent exposure of importers to the risk of financial penalty if suppliers’ environmental emissions data is incomplete, inaccurate or worse will create an additional set of risks that will need to be mitigated in existing supply contracts.
The emergence of contractual risks will support the emergence of third party verification service providers, which can be expected to ramp up coverage of environmental emissions from the initial industries selected in the EU and its main suppliers. This is likely to represent a market opportunity for classification societies’ environmental services teams for jurisdictions where mutual recognition of environmental monitoring standards is not likely to be acceptable.
The devil, as ever, lies in the detail. Industry representative organisations within the EU, such as Eurofer, are lobbying for the introduction of default values (applicable to all imports that do not provide specific data) at a level that will lead to more polluting exporters in targeted sectors being priced out of the market, citing concerns about ‘carbon leakage’ (or the diversion of production from the EU to jurisdictions with lower environmental emission standards).
A separate question mark hangs over the potential application of the EU’s CBAM to cross-border trade with the UK, and to an even greater extent to trade with Northern Ireland, which remains subject to EU environmental regulations under the Windsor Protocol. This is likely to be the subject of negotiations.
What is the CBAM
The initial phase of the CBAM will see the introduction of reporting requirement under the EU’s Carbon Border Adjustment Mechanism for the emissions embedded in imports of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen into the EU from Third Countries outside the EU and a number of EEA states will enter force on 1 October 2023.
This will see the introduction of quarterly reporting from Q4 2024 with the first reports due in January 2024. The monitoring and reporting rules will be closely aligned with the EU Emissions Trading System (ETS) rules, but the European Commission will permit the use of default values or other monitoring and reporting methods until July 2024.
The scheme will introduce requirements for non-EU suppliers to document their emissions to avoid the application of “default values” for embedded emissions. While the precise level of the embedded emissions is still being finalised, the levels are expected to be high enough to encourage disclosure for producers.
EU importers who fail to comply with the reporting requirements face penalties of up to EUR50/tonne during the trial phase. Once the first payments for the levy begin in 2026, the cost of imports will be based on the EU’s own carbon price, using the ETS mechanism.
Imports from countries which have their own ETS or carbon levy systems will be allowed to offset any CO2 price levied in their jurisdiction of origin from the EU price. However, the impact will be to prevent manufacturers or producers benefiting from ‘regulatory arbitrage effects’ by locating production in locations with lower environmental regulations.
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