Carbon Tax Comes Into Effect This Autumn. What Rules Has the European Commission Set for Imports from Highly Polluting Industries?

In order to maintain the competitiveness of producers and prevent the relocation of production from the European Union to third countries, the European Commission is introducing a carbon tax applicable to imports of products from highly polluting industries, specifically for producers of cement, cast iron, iron and steel, aluminum, fertilizers, electricity, and hydrogen, all of which are considered “CBAM products.”

By Mihai Petre, Director, Indirect Taxes – International Trade, EY Romania, Daniela Neagoe, Senior Manager, Indirect Taxes – International Trade, EY Romania, and Adriana Nedelescu, Senior Manager, Indirect Taxes – International Trade, EY Romania

In May of this year, EU Regulation 956/2023 was published, establishing a Carbon Border Adjustment Mechanism (CBAM), commonly known as the Carbon Tax, applicable from October 1, 2023. Based on this regulation, starting in 2026, importers of CBAM products will need to purchase “CBAM certificates” to cover their carbon emissions, at prices corresponding to the current carbon price in the EU.

What are the explanations for these rules and how will companies be required to act in the coming period?

Importers of these CBAM products will need to register either individually or through a representative (in cases where the importer is not established in an EU Member State and the customs declaration is submitted through indirect representation) with national authorities, from where they can also acquire CBAM certificates. The price of the certificates will be calculated based on the average weekly auction price of EU ETS certificates, expressed in EUR/tonne of emitted CO2.

Obligations during the transition period

From October 1, 2023, until December 31, 2025, a transition period will take place, during which importers will only have reporting obligations for emissions incorporated into imported CBAM products, without the obligation to pay any tax.

The information will be reported by the authorized declarant within the CBAM in an electronic database provided by the European Commission – the CBAM Transitory Register. The first reporting must be submitted by January 31, 2024, for goods imported in the fourth quarter of 2023.

Regarding penalties, the penalty for failure by an authorized CBAM declarant to return CBAM certificates is identical to the penalty provided for in the Directive establishing a scheme for trading greenhouse gas emission allowances, according to the applicable rules in that year. However, in cases where goods have been introduced into the EU by an unauthorized person, the amount of these penalties will be three to five times higher.

For the transition period (October 1, 2023 – December 31, 2025), a draft Regulation on the application of Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism was published on the European Commission’s website on June 13, 2023. This was published for public debate, and comments were accepted until July 11, 2023.

Among the most important provisions of the draft Regulation:

Reporting obligations and the information requested from EU importers of CBAM goods, as well as the provisional methodology for calculating incorporated emissions released during the CBAM goods production process.
During the transition period, the declarant has several options to calculate the emission factor as an alternative to the European Commission’s methodology, such as: based on specific implicit values (CO2 emission factors from a third country) or based on reliable data demonstrated by the importer.
The penalty value for each tonne of unreported incorporated emissions is between EUR 10 and EUR 50 per tonne, depending on several criteria (e.g., unreported quantities).

How do all of these impact companies’ activities, and what is important to know and do, both in the interim period and from the moment of actual implementation?

For importers of CBAM products, it is recommended to assess the impact of these changes on the company’s operations and consider the following important actions:

Collect data on EU imports of CBAM products, starting from the last quarter of 2023.
Contact suppliers and request information regarding production locations/production flows/emission calculation methods.
Gain access to the CBAM application.
Implement an internal procedure for managing CBAM compliance, including internal costs for reporting and record-keeping, emission calculation, and documentation.
Prepare and submit quarterly reports.

Equally important is for each importing company to analyze the draft regulation for the transitional period, and potentially submit questions concerning it, to ensure that all details of the regulation’s implementation are clear.