International Taxation

Germany: EU Carbon Border Adjustment Mechanism

An analysis by Flick Gocke Schaumburg, Taxand Germany:

Starting from 1 October 2023, the European Union (EU) will commence the implementation of a transitional phase of the Carbon Border Adjustment Mechanism (CBAM) as part of its “Fit for 55” package of measures.

The CBAM is designed to tackle carbon leakage, which occurs when companies relocate their production to non-EU countries with less stringent carbon regulations. Importers of various products including iron, steel, cement, aluminium, electricity, fertilizers, hydrogen, as well as certain intermediate, upstream, and downstream products within the EU, will be required to pay a CO2 price. This measure aims to ensure that EU companies producing comparable products are not put at a competitive disadvantage.

Rainald Vobbe, German Taxand member firm, Flick Gocke Schaumburg, provides an analysis of how this new tax mechanism functions, its phases of transition and implementation, and the tax implications for importers.

Read the full article on the details of the CBAM mechanism below.


From 1st October 2023: first obligations based on the Carbon Border Adjustment Mechanism (CBAM)

As part of its “Fit for 55” package of measures, the EU introduced the Carbon Border Adjustment Mechanism (CBAM) for importers of iron, steel, cement, aluminium, electricity, fertilisers and hydrogen, as well as certain intermediate/upstream products and some downstream products. After long negotiations, the final CBAM implementing regulation was published on 17 August 2023. In this process, a transitional phase will commence step by step on 1st October 2023, which entails the first obligations for affected companies.


Reduction of free ETS allowances

In 2005, the European Emissions Trading Scheme (EU-ETS) was introduced in the EU as a central climate protection instrument. In order to relieve companies in energy-intensive sectors and thus control the risk of carbon leakage, they had previously been allocated free EU-ETS certificates over a long period of time. Now, however, the number of pollution allowances is to be reduced more rapidly than previously planned and free allowances are to be gradually phased out by 2034.

For companies in the EU, this would create a strong incentive to shift at least part of their production to non-EU countries. This could lead to a “carbon leakage”, which means that CO2 emissions are simply shifted without there being any real reduction. The CBAM is intended to counteract this. Those who import certain products from non-EU countries into the EU must also pay a CO2 price according to the regulation. Companies in the EU that manufacture comparable products for which an EU ETS certificate would also have to be purchased would therefore not be at a competitive disadvantage. At the same time, the danger is reduced that emission reductions in the EU are accompanied by rising emissions outside the Union as a result of a simple relocation of production.


How the CBAM works

All companies that import iron, steel, cement, aluminium, electricity, fertilisers, hydrogen or upstream and downstream products from non-EU countries into the EU are affected. The “CO2 price” is calculated on the basis of the greenhouse gas emissions associated with the goods. In future, one CBAM certificate will be purchased for each tonne of CO2, N2O or HFC emitted during the production of the goods. The price per CBAM certificate is based on the average weekly price for EU emission certificates, which is currently around 90 euros.

The main area of application will initially be direct emissions that occur in the production process of the goods. In the course of the transition period, however, it will be examined as to whether the CBAM can also be extended to indirect emissions. Indirect emissions arise from the consumption of purchased energy sources, such as electricity, heat or steam. For this purpose, indirect emissions must be documented for the import of fertilisers, cement and electricity. An expansion is likely soon.

In order to be allowed to import the goods concerned into the customs territory of the EU in the first place, customs declarants must first apply for the status of “authorised declarant”. This status entails certain obligations, such as regular declaration obligations, the calculation and documentation of emissions and, of course, the acquisition of allowances.

If a company has already paid a CO2 price in the country of origin of the imported goods, a reduction in the number of CBAM allowances to be surrendered can be claimed. The prerequisite is documentation certified by an independent person that proves the existence of a CO2 price in the country of origin and that this price was actually paid. Furthermore, no export refund or other form of compensation may have been granted to the declarant for this purpose. The qualification of the certifying person is determined by the EU through implementing acts.

In the event of false information or the absence of required CBAM certificates at the time of import, importers must expect sanctions. Initially, these will mostly be of a financial nature, but can extend as far as the withdrawal of the status of “authorised declarant”.


Transition and implementation phase

As early as mid-2021, the EU Commission submitted a proposal for the introduction of a CO2 carbon border adjustment mechanism. The Commission, the Council and the European Parliament agreed on a draft regulation in December 2022. After this was formally adopted on 17th April 2023, the Commission is now publishing the final CBAM implementing regulation exactly four months later.

The CBAM itself will enter into force on 1st October 2023. There will then be a transitional period until the end of 2025, during which the mechanism will be introduced gradually. Importers are already obliged to register during this period. Although no financial compensation has to be paid for the import of CO2-polluted goods until the end of 2025, there are already calculation and documentation obligations regarding the “grey emissions” in the production process of the imported goods. From 31st January 2024 at the latest, a CBAM report must be submitted quarterly for this purpose, which records the import quantity of CO2 emissions emitted and CO2 prices already paid in the country of origin.

More far-reaching obligations will then come into force at the beginning of 2026.

In addition to applying for the status of approved declarant, it will become mandatory to purchase CBAM certificates when importing goods. The calculations of emissions and other data to be reported in an annual CBAM declaration will henceforth be verified by an accredited verification authority.

Importers of goods into the EU should therefore already prepare for the changes at the turn of the year.


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