In today’s world, climate protection and sustainability have never been more important. The European Union’s Carbon Border Adjustment Mechanism is a new system that will impact global trade and business practices. But what exactly is CBAM, how will it affect companies, and what can businesses do to prepare? This article breaks down CBAM and provides practical guidance to help businesses adjust.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The EU has set an ambitious goal of becoming climate-neutral by 2050, as outlined in the European Green Deal and the Fit for 55 packages. A major element of this strategy is the CBAM, designed to reduce CO₂ emissions and prevent “carbon leakage” — where companies move production to countries with weaker environmental standards to avoid costs.
From October 1, 2023, companies importing energy-intensive goods like iron, steel, cement, aluminium, fertilizers, and electricity into the EU must report their carbon emissions. Over time, more sectors will be included in the regulation. The overall aim is for businesses to monitor and report emissions and buy certificates to offset the CO₂ their products generate.
Background: Why Was CBAM Introduced?
The introduction of CBAM is a direct response to the challenges posed by the EU’s Emissions Trading System (ETS). Since 2005, companies have been required to purchase certificates for their CO₂ emissions. Although ETS was intended to incentivize emission reductions, it sometimes led to “carbon leakage,” where companies moved production to countries with less stringent climate regulations.
This is a corrective measure, ensuring that both domestic and imported goods face the same CO₂ costs, encouraging companies to adopt cleaner production methods and supporting global climate action.
How does CBAM work?
CBAM essentially functions through the following mechanisms:
- Emission Tracking
Companies importing goods into the EU must track and report the CO₂ emissions associated with those products. This calculation follows standardized EU methodologies. - Certificate Purchase
For each ton of CO₂ produced by these imported goods, companies must purchase corresponding certificates. The price of these certificates is linked to the EU ETS market price. - Reporting and Verification
Companies are required to regularly report their emissions data, and authorities verify this information to ensure compliance with CBAM regulations.
CBAM Implementation: Compliance Requirements
To meet the obligations, companies need to adopt strategic measures. The key aspects include:
- Emission Reporting
Companies importing goods into the EU must submit reports on the CO₂ emissions of their products starting in 2023.- From 2026, companies will need to buy certificates based on the CO₂ emissions generated by their products. The cost of these certificates will depend on how much CO₂ the goods emit.
- Monitoring Emissions
Companies should implement systems for monitoring and calculating their CO₂ emissions. This is crucial for keeping track of emissions and implementing targeted reduction measures. - Collaboration with Suppliers
Close collaboration with suppliers is essential to obtain the necessary emissions data and ensure it is accurate and complete. Diversifying suppliers can help mitigate the risks posed by CBAM. - Support and Consulting
Numerous organizations and institutions offer training and consulting services to help companies implement CBAM. This support can be crucial for efficiently meeting the new requirements. Companies must develop strategic measures to meet the requirements.
Impact of CBAM on Businesses
This will affect different businesses in various ways, depending on their sectors and trade practices. Here are some of the key impacts:
- Competitiveness
CBAM protects European companies from unfair competition from foreign producers with lower environmental standards. At the same time, it increases the cost of imported goods, which could raise prices for end consumers. Companies must make strategic decisions to maintain their competitiveness and adapt to the new market conditions.
- Need for Adaptation
Companies exporting products to the EU must prepare for CBAM by tracking their CO₂ emissions and providing corresponding evidence. This requires investments in emission monitoring and reporting, as well as potentially in lower-emission technologies. Companies should also prepare for rising costs of emission certificates and review their supply chains to identify potential risks.
- Supply Chain Changes
Many businesses will need to reconsider their suppliers, favouring those with lower emissions or from regions with stricter environmental regulations. This could mean favouring suppliers with lower CO₂ emissions or those located in countries with strict emission regulations.
- Encouraging Innovation and Technological Change
The pressure to reduce emissions should encourage companies to invest in innovative and more environmentally friendly technologies. CBAM can thus act as a catalyst for technological change, motivating companies to invest in sustainable production methods and renewable energy.
- Training and Awareness
Employees at all levels of the company must be informed and trained on CBAM requirements and impacts. This includes not only training employees directly involved in implementing CBAM requirements but also raising awareness among all employees about the importance of climate protection and sustainability.
- Financial Support
The European Union and national governments offer various funding programs to support businesses investing in sustainable practices. Companies should take advantage of these programs of these opportunities to offset the cost of compliance.
Long-term planning and the integration of sustainable practices into business strategy are crucial. Companies should regularly inform their stakeholders, including customers, investors, and partners, about their progress in reducing emissions and implementing CBAM requirements. Transparent communication can help build stakeholder trust and strengthen brand reputation.
Examples of Industry Adjustments
Several industries are already taking steps to comply with CBAM and mitigate its impact. Here are some examples:
- Steel Industry
The steel industry is among the most affected sectors due to the high CO₂ intensity of steel production. Some companies in the steel industry have already invested in emission reduction technologies, such as using hydrogen instead of coal in the blast furnace process. One example is the “H2 Green Steel” project, which is developing an emission-free production process using green hydrogen. - Chemical Industry
The chemical industry also faces significant challenges from CBAM. Companies in this sector are increasingly adopting circular economy practices and low-emission production methods. By using renewable energy and optimizing production processes, they can improve their CO₂ balance and minimize additional costs from CBAM. A concrete example is BASF, which is working on developing climate-neutral production methods and researching the use of biogas and green hydrogen in its processes. - Automotive Industry
The automotive industry relies heavily on global supply chains and must therefore closely examine its suppliers’ CO₂ emissions. Some automakers have already begun integrating sustainable materials and low-emission production methods into their supply chains. For example, BMW is working with its suppliers to reduce CO₂ emissions across the entire supply chain and increasingly uses recycled materials. Tesla is another example, consistently relying on renewable energy and sustainable production methods to improve its CO₂ balance.
Practical Steps for Preparing for CBAM
To effectively prepare for CBAM, companies should take the following steps:
- Internal Emissions Analysis
Companies should first conduct a thorough analysis of their CO₂ emissions and the potential impact of CBAM. This includes assessing current emissions, identifying emission sources, and developing a comprehensive plan to reduce emissions. A detailed analysis helps identify the necessary steps to comply with the requirements and plan the required resources. - Investments in Low-Emission Technologies
The use of new technologies can significantly reduce CO₂ emissions. Companies should invest in technologies that make their production processes more efficient and environmentally friendly. This may include the use of renewable energy, the introduction of energy-efficient machinery, or the optimization of production processes. Long-term investments in sustainable technologies not only help meet the requirements but also strengthen the company’s competitiveness. - Collaborations and Partnerships
Partnering with other companies and industry organizations can facilitate the adjustment process. By sharing best practices and collaborating on research and development, companies can jointly develop solutions to tackle the challenges of CBAM. Partnerships with technology providers and research institutions can also help find and implement innovative solutions. - Communication and Training
Open and transparent communication about the impacts and requirements is crucial. Companies should comprehensively train and inform their employees to ensure that everyone understands and can implement the new regulations. Regular training and awareness programs promote awareness of climate protection and sustainability throughout the company. - Utilization of Funding Programs and Incentives
The EU and national governments offer various funding programs to support companies in implementing climate protection. Companies should take advantage of these programs to receive financial support for their investments in sustainable technologies and processes. Careful review and application for funding can significantly reduce the financial burdens of CBAM.
Future Outlook and Developments
CBAM is part of a broader global trend towards stricter climate regulations. As the EU continues to lead in climate protection, other regions may implement similar measures. Companies that act early to comply will not only reduce their environmental impact but also gain a competitive edge in the market.
To remain resilient, businesses should regularly review their strategies, stay informed about regulatory updates, and be prepared for potential expansions of CBAM. Collaboration with industry associations and policymakers can help shape future developments and ensure smoother compliance.
Conclusion
The Carbon Border Adjustment Mechanism represents both a challenge and an opportunity for businesses. While companies must adjust to new compliance measures and potentially higher costs, CBAM also incentivizes innovation and sustainability. Through careful planning, investment in clean technologies, and leveraging available resources, businesses can navigate CBAM successfully and strengthen their market positions in a climate-conscious world.
Early adopters who integrate sustainability into their long-term strategies will be well-positioned to benefit from these regulatory changes and lead the way in global climate action.
CBAM: How Our Experts Can Help You
We offer comprehensive support for those looking to prepare for the new CBAM regulations. Our expertise in environmental and compliance management includes consulting, carbon footprint analysis, technological solutions for monitoring CO₂ emissions, as well as training and workshops to ensure compliance with CBAM requirements.
Do you have any questions? Don’t hesitate to contact us by clicking the button below or emailing us directly at consulting@intersolia.com.
