What is the CBAM Transition Period and First Phase Applications?

Actions to be taken against climate change must be carried out with a global perspective and collaboration in mind. The European Union and member countries are conducting their work by taking actions in line with the EU 2030 and EU 2050 targets under the heading of minimizing the carbon footprint. The CBAM, which is part of Europe’s Fit for 55 Package, will serve to reduce Europe’s greenhouse gas emissions by 55% by 2030.

The Carbon Border Adjustment Mechanism[1] (CBAM), was adopted by the European Parliament and the European Union Commission on May 16, 2023. [2] CBAM will essentially provide fair pricing for the carbon emissions of products exported to the European Union. CBAM came into effect based on reporting, focusing on products imported into the European Union from October 1, 2023. From January 1, 2026 onwards, the financial obligations of the Mechanism’s implementation will begin.

It is expected that CBAM will affect approximately 200,000 European importers and exporters located in third world countries that cooperate with these importers. Detailed information about CBAM is published by the European Commission. [3]

Under the current regulation, the years 2023 – 2025 are the Transition Period. During this transition period, Scope 1 emissions are monitored for the Iron and Steel industry, and Scope 1 and Scope 2 emissions for other industries. Scope 1 emissions include controllable and owned emissions; Scope 2 includes indirect emissions from energy production. Scope 1 and Scope 2 are applied in the cement, electricity, fertilizer, aluminum, and hydrogen industries. According to the current regulation, 2026 has been designated as Phase One. In the expanded CBAM application, Scope 1 and Scope 2 will start to be applied in additional industries, including coal, asphalt bitumen, petroleum products, chemicals, glass, ceramics, and non-ferrous metals, in addition to the existing industries. In the near future, Scope 3 is also expected to be considered and the application will be extended to all sectors.

During the transition period planned between 2023 – 2025, the carbon emissions of certain products imported into EU countries must be reported. The report should include the total amount of goods subject to CBAM in MWh units, the carbon emissions from the production of the goods, and payments made against carbon emissions in the country where the product is produced, if applicable. Detailed information on reporting can be accessed from the regulation document published by the European Commission. [4] The European Commission has also prepared and published a guide document for institutions importing into Europe. [5]

This reporting obligation belongs to an importer established in the EU (the person making the customs declaration for free circulation in the EU) or an indirect customs representative who agrees to undertake this duty. For an importer established outside the EU, the obligation always belongs to the indirect customs representative. To perform these transactions, the responsible party is assigned an EORI (Economic Operators Registration and Identification number) by the relevant customs authority. Using this EORI number, the requested data is entered into the portal provided by the European Commission to carry out the transactions.

From January 1, 2026, CBAM will be fully implemented, and financial obligations will be imposed on organizations importing to Europe. From this date, only importers who have made an approved CBAM declaration will be able to carry out imports to European countries. Also, the total carbon emissions of the products exported in the previous calendar year will be reported annually on May 31. These declared emissions must be approved by an accredited national verifier located in the European country.

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A new series of legislation ensuring the uniform implementation of CBAM across Europe and ensuring the obligations are fully met is expected to be voted on and enacted by the CBAM Committee, consisting of representatives from EU Member States, before 2026. The CBAM Committee regularly reports the effectiveness of CBAM to the European Parliament.

Organizations exporting to European countries need to prepare by continuing appropriate adaptation investments during the transition period between 2023 – 2025 and Phase One in 2026, to fully comply with CBAM obligations without losing and even increasing their competitiveness in the European market.

In addition to Scope 1, 2, and 3 Carbon Emission analyses of institutions, it is critical to research the carbon emission sources of the top 3 products generating the highest revenue from exports to Europe and to correctly project the investments. PMO Partners, with Open Analyser, identifies the factors with the highest impact on product carbon emissions and, in partnership with the organization, carries out projects aiming at minimizing the organization’s carbon footprint and achieving sustainable transformation.

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References:

[1] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R0956

[2] https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

[3] https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#legislative-documents/

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ%3AJOL_2023_228_R_0006#d1e40-94-1

[5] https://taxation-customs.ec.europa.eu/system/files/2023-11/CBAM%20Guidance_EU%20231121%20for%20web_0.pdf

[6] https://www.linkedin.com/pulse/cbam-why-cautious-approach-free-allocations-phase-out-necessary/