Q&A: How CBAM is set to transform EU steel imports

MEPS International has compiled a one-stop Q&A to answer some of the steel sector’s most frequently asked questions about the European Commission’s incoming Carbon Border Adjustment Mechanism (CBAM).

Read on to learn more about the motivation for the new regulation and the timeline for its phased rollout and full implementation. Also, discover what your business needs to do now to set it on the path to compliance in quarter four and beyond. 

What are the European Commission’s CBAM import regulations? 

CBAM is an element of the ‘Fit for 55’ package unveiled as part of the EU’s European Green Deal in July 2021. 

This outlined a target of delivering a 55 per cent reduction in carbon emissions between 1990 and 2030 on the way to becoming a climate-neutral continent by 2050. 

CBAM will aim to prevent the Commission’s stringent CO2-cutting measures from causing an exodus of CO2-intensive EU manufacturing processes to less heavily regulated markets. This is commonly referred to as ‘carbon leakage’.  

It will do this – and seek to avoid the risk of cheaper, less sustainably produced goods flooding the EU from other countries – by imposing an import duty according to a product’s embedded carbon emissions. 

The CBAM covers a selected number of goods at high risk of carbon leakage, including: iron; steel; cement; fertiliser; aluminium; hydrogen; and electricity generation. 

Approximately 1.8 to 3.0 tonnes of CO2 are emitted for every tonne of steel produced in a blast furnace. The direct CO2 emissions (melting) of an electric arc furnace are about 0.1 tonnes and the indirect CO2 emissions (electricity generation) are approximately 0.4 tonnes, for each tonne of steel produced. 

How will the European Commission’s CBAM regulations work? 

The European Commission’s CBAM regulations are designed to function in parallel with the current EU Emissions Trading System (EU ETS). 

When a company buys a carbon allowance from the EU ETS, it gains permission to generate one tonne of CO2 emissions. EU steelmakers currently receive free emission allowances under the EU ETS scheme; however, these are gradually being phased out. 

The Commission said that free EU ETS allowances had served to “dampen the incentive to invest in greener production at home and abroad”. 

CBAM involves applying a carbon price to imports of certain goods into the EU. Initially, only direct emissions from steel production will be considered by CBAM certificates. 

EU importers will buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU's carbon pricing rules. 

If a non-EU producer can show they have already paid a price for the carbon used in the production of the imported goods, in a third country, the corresponding cost can be fully deducted for the EU importer. 

If importers cannot provide emissions data, they will face the CBAM’s punitive default values for emissions. 

What is the timeline for the rollout of CBAM levies? 

A simplified version of CBAM will begin to operate from October 1, 2023. During an initial transition period, this will only oblige importers to collect and report carbon data. 

From 2026 onwards, the CBAM will be fully implemented and the levy – linked to the EU’s carbon market price (€99/tonne in mid-2023) – will be payable.  

EU importers will have to annually declare the quantity of goods and the amount of embedded emissions in the goods they imported into the EU in the preceding year, and surrender the corresponding amount of CBAM certificates. 

However, this levy will be gradually phased in, from 2026 to 2034, in parallel to a phasing out of the free allowances under the EU ETS. This phasing in period is illustrated here: 

Do I need to take action now to ensure my business is CBAM compliant? 

As reported by MEPS earlier this week, the European Commission is still finalising plans for the implementation of CBAM. Now is the time to become familiar with the proposed reporting process and have a say in its implementation.  

Consultation on its draft Implementing Regulation document is open from June 13 to July 11. This provides guidelines on the proposed methodology used to calculate an imported product’s CO2 emissions and the CBAM reporting process.  

An outline of information to be submitted in CBAM reports can also be found in the publication’s accompanying annexes. 

The Commission indicated that a CBAM Transitional Registry platform will be used for the filing and management of CBAM reports. This should be compatible with existing customs systems, it said. 

While the formal process of CBAM reporting has yet to be finalised, an indication was given of potential fines for non-compliance. 

The Commission said: “The amount of the penalty, for each tonne of unreported embedded emissions shall be between EUR 10 and EUR 50.” 

In the initial transition period (from October 2023 to the end of 2025), when the CBAM’s scope is limited to the reporting of data with no financial obligation, the amount of penalty should be based on “the gravity and duration of the failure to report”, it added. 

Will there be CBAM implications for transport and shipping? 

Transport emissions are not currently included in CBAM as only direct emissions from steel production are considered.  

However, there are plans to assess indirect emissions through complex supply chains during the CBAM transition period. 

Additionally, an agreement has been reached to include maritime shipping emissions for products covered by the EU ETS scheme, specifically those produced in the EU and shipped within or outside of the EU. This inclusion is set to take effect from 2024. Shipping-related emissions will therefore be dealt with separately.  

This could also change depending on the outcome of the EU's evaluation of data gathered during the CBAM transition period, however. 

What will happen to the funds generated from CBAM tariffs? 

Major EU steel producers have called for the funds raised by CBAM tariffs to be used to help facilitate the sector’s transition to low-emission production processes. 

MEPS recently reported on the need for the European Commission to introduce financial support to help businesses’ net zero transition and energy sector reform to facilitate the push towards its ‘Fit For 55’ emissions targets. 

But while the Commission has confirmed that “revenues from CBAM will contribute to the EU's budget” it has yet to launch a package offering financial support to businesses.  

A scheme similar to the United States’ Inflation Reduction Act has yet to be realised. 

Do any other countries have plans to impose EU-style CBAM import tariffs? 

The European Commission claims that a number of countries, including Canada, Japan and the United Kingdom, are planning initiatives similar to CBAM. 

Other countries are seeking exemptions or considering applying retaliatory tariffs. WTO rules will also allow countries to challenge the validity of the scheme. 

Currently, California is one of few global regions to impose a CBAM-style tariff model, with additional charges levied on some electricity entering the US state. 

What is the history of the European Commission’s carbon emissions-related import regulations? 

2005 – The European Commission introduced its EU ETS. This was a ‘cap and trade’ scheme where a limit is placed on the right to emit specified pollutants in the region. 

2019 – Commission President Ursula von der Leyen unveiled the European Green Deal. This was a set of ambitious policy initiatives with the overarching aim of making the EU climate neutral in 2050. 

2021 – The Commission proposes its Carbon Border Adjustment Mechanism (CBAM) with the aim of equalising the price of carbon between domestic products and imports. 

April 2023 – The European Parliament ratified CBAM. 

October 2023 – The transition period for CBAM starts. Importers must collect and report carbon data. 

January 2026 – Definitive CBAM measures start, beginning the phase-out of the EU Emissions Trading System (EU ETS). 

January 2034 – EU Emissions Trading System (EU ETS) ends.