Extensive CBAM reporting requirements for transitional period

16/06/23

The detailed regulations stipulating how, what and when to report for the Carbon Border Adjustment Mechanism (CBAM) have been published for consultation. The provisions concern the practical CBAM reporting requirements during the transitional phase that begins on 1 October 2023 and runs until the end of 2025. Starting 1 January 2026, CBAM certificates will need to be purchased as CBAM enters full force (with a gradual phase in).

The draft implementing regulation confirms (for the transitional phase) the reporting obligations for importers (i.e. the ‘reporting declarants’) of CBAM goods, as well as the provisional methodologies for calculating the relevant emissions for the specific CBAM goods.

The transitional period is essentially intended to be a learning period, to find out what works for CBAM reporting, both for the supervising authorities and the reporting companies. Nonetheless, penalties can be imposed for undeclared embedded emissions. This also means that after the transitional period, reporting regulations could (slightly) change from what they currently involve.

On 13 June 2023, the European Commission launched a public consultation on the draft implementing regulation Carbon Border Adjustment Mechanism (CBAM). Comments can be submitted until 11 July 2023. Feedback is sought on the specific implementing rules in the draft legislation and not on the CBAM regulation, which is already in force.

What does this mean for your practice?

Importers of CBAM goods will only have a short period of time after formal adoption of the draft implementing regulation (expected August - September 2023) to start collecting all the exact required GHG emissions data on imports in Q4 2023.

Operators of industrial plants in non-EUcountries that emit GHGs related to the production of CBAM goods which are imported into the EU, should already prepare themselves for providing information for the purpose of CBAM reporting on EU imports. They will also need to make a decision on what data they would/can share through the central EU CBAM (transitional) register, for the purpose of CBAM reports.

PwC can provide practical assistance to importers and operators of installations in this regard and support thinking through the further implications of CBAM for your organisation, as well as assist with calculations and implementation.

CBAM from 1 October 2023

The CBAM has two phases: the transitional (or ‘start-up’) phase and the effective incentive phase. During the transitional phase, the CBAM is already in force, but not yet requiring importers to purchase CBAM certificates.

Importers need to start preparing and lodging CBAM reports on a quarterly basis from 1 October 2023. In it, so-called ‘embedded emissions’ (a defined term) are reported. Embedded emissions mainly concern direct emissions (i.e. emissions released during the production of goods) and in certain cases also indirect emissions (broadly, emissions from the production of electricity consumed during production processes).

The CBAM report also requires any carbon prices actually paid in non-EU countries to be disclosed (in the transitional period purely for information purposes and therefore with no credit offset).

CBAM reports need to be filed within a month after the end of the reporting quarter, with an additional month to correct any possible errors in the submitted report. The first CBAM report (covering the fourth quarter of 2023) is due by 31 January 2024 and can be amended up to 29 February 2024. The last CBAM report of the transition period (for the last quarter of 2025) must be submitted by 31 January 2026.

The CBAM report must be prepared and submitted digitally through an IT system still being developed by the European Commission. If a company has not imported any CBAM goods in a quarter, no report needs to be submitted.

CBAM draft implementing regulation: calculation of emissions

The draft implementing regulation provides some flexibility on the values used to calculate embedded emissions at the point of importation. During the first year of implementation, companies will have the choice of reporting embedded emissions in three ways:

full reporting under the new methodology (EU methodology: Annex IV, CBAM-regulation, which is broadly in line with the EU Emissions Trading Scheme);
reporting based on equivalent third-country (non-EU) national systems; and
reporting based on reference values.

For each import of CBAM goods for which the reporting declarant does not have all the information mentioned above, the reporting declarant may - until 31 July 2024 - use other methods for determining the direct emissions. In such a case, the reporting declarant has to indicate and reference (in its CBAM report) the methodology followed to establish such values.

From 1 January 2025, the last year of the transitional period, only the EU methodology will be accepted. Therefore, businesses impacted by CBAM should begin the process to record and report under this methodology as soon as practical.

Further, for the transitional period, the Commission will make default values available in certain circumstances. When reporting the actual emissions for complex goods (option 1 of the methodologies above), these default values (which are not yet known) can be used for input materials or subprocesses contributing to less than 20% of the total emissions of the good.

The implementing regulation provides for a range of penalties that are to be imposed to a reporting declarant who has failed to submit the CBAM report in a complete manner. The penalties are based on the amount (tonnes) of undeclared embedded emissions.

The Commission is developing special IT tools to help importers perform these calculations and to report, as well as in-depth guidance, training materials and tutorials to support companies when the transition mechanism starts.

What are the next legislative steps in the EU?

The draft implementing regulation will be formally adopted by the Commission later this summer after a vote in the CBAM committee, which consists of representatives from EU member states. This will follow the period of public consultation, which ends 11 July 2023.

In the Dutch legislative process, a Letter of amendment on the legislative proposal transitional period on introduction of CBAM (‘Nota van wijziging wetsvoorstel overgangsperiode bij invoering CBAM’) was sent to the Dutch House of Representatives on 6 June.