CBAM: A new pop group or regulation change?

If you've been hearing whispers about CBAM lately, I can assure you it's not the latest boy band to hit the charts. CBAM, or the Carbon Border Adjustment Mechanism, is the European Union's newest tool in the fight against climate change, and it's causing quite a stir in the business world.

What is CBAM?

CBAM is essentially a carbon tax on imports entering the EU. It aims to level the playing field between EU producers, who are subject to strict emissions regulations, and their international competitors who might not face the same environmental standards. The mechanism initially targets carbon-intensive goods like cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen.

CBAM's Journey So Far

The EU kicked off CBAM's transitional phase on 1st October 2023. During this period, which runs until the end of 2025, importers need to report the embedded carbon emissions in their goods but aren't required to make any financial payments yet.

At the recent COP29 climate conference in Baku, CBAM became an unexpected hot topic. Developing countries, led by China, Brazil, India, and South Africa, pushed to include discussions about "climate change-related, trade-restrictive unilateral measures" on the official agenda. While this attempt was unsuccessful, it highlighted the growing tension between climate policies and international trade.

What's Coming in 2025?

For businesses, 2025 is shaping up to be a crucial year for CBAM preparations:

1. From 1st January 2025 only the EU method for reporting greenhouse gas emissions will be accepted.

2. By 1st July 2025 importers must report actual emissions for each CBAM good they bring into the EU.

3. Throughout the year, quarterly CBAM reports will still be required.

Looking Ahead

The real game-changer comes in January 2026 when CBAM enters its definitive phase. At this point, importers will need to start purchasing CBAM certificates to account for the carbon emissions in their imported goods. This shift from reporting to financial obligations marks a significant change in how international trade interacts with climate policy.

For businesses, especially those dealing with CBAM-affected goods, now is the time to start preparing. Understanding your supply chain's carbon footprint, exploring ways to reduce emissions, and staying informed about CBAM developments will be crucial for navigating this new regulatory landscape.

While CBAM might not top the music charts, it's certainly set to be a chart-topper in the world of international trade and climate policy. Stay tuned!