CBAM Compliance: Key Corporate Obligations in Focus

I. Overview of Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (“CBAM”) is a system implemented to reduce greenhouse gas emissions and prevent carbon leakage. The European Council and Parliament adopted the legislation on 10 May 2023, which subsequently entered into force on 17 May 2023. The European Green Deal includes CBAM as a strategy for achieving climate neutrality by 2050, as set forth by the European Union ("EU"). In order to achieve this objective, the EU has agreed to a reduction of greenhouse gas emissions by 55% by 2030 compared to 1990 levels. Two stages are planned: the transitional phase and the definitive regime, which will be explained in detail later. The transitional phase began on 1 October 2023 and is scheduled to conclude on 31 December 2025. The definitive regime is scheduled to commence on 1 January 2026.

II. Aims of Carbon Border Adjustment Mechanism

The fundamental objective of this regulatory framework is to establish a fair and competitive environment for goods imported into and produced within the European Union. This is with a specific focus on safeguarding the competitiveness of European Union producers. The calculation of the carbon footprints of imported goods from non-EU countries and the regulation of financial obligations play an essential role in the fight against climate change. Another crucial objective is the prevention of carbon leakage. Carbon leakage can be explained by the relocation of production to countries with less stringent climate regulations and penalties, often from countries with stricter regulations and penalties. Consequently, corporations tend to relocate the output of carbon-intensive industries to non-EU countries rather than reduce carbon emissions within the EU. Despite the same quantity of gas emissions, these corporations are charged a lesser tax burden than EU producers. It is clear that this creates an unfair competitive advantage for non-EU producers.

III. Regulated Sectors

The sectors that have been selected as those with a high risk of carbon leakage are where this situation can be observed. These sectors are included in this regulation: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The European Parliament suggested including polymers and organic chemicals in the regulation after the transitional phase. However, it should not be forgotten that the important thing is not whether the sector that exporters export is one of the sectors listed above but whether the product they export is included or not. Therefore, if the imported product is included, importers in the EU must report these imported products.

IV. Obligations During The Transition Phase

As mentioned above, there are two different regimes. The transition phase started on 1 October 2023 and will last until 31 December 2025. This phase does not entail any financial burden for corporations. Consequently, corporations are expected to increase their regulatory compliance and improve their reporting performance.

A. Reporting Obligation

In light of this perspective, the first obligation is the reporting obligation. This obligation is imposed on those who import CBAM goods. However, certain exceptions to this rule exist. A list of exceptions can be found in CBAM 2(3). A minimum limit is determined as €150. Goods are being carried with personal luggage, and goods in the context of military use are also exceptions. It is the obligation of the companies in this context to submit the report on a quarterly basis, and this cannot be delayed by more than one month after the end of the quarter. The aforementioned reports shall be submitted online. According to the Carbon Border Adjustment Mechanism Article 35/2, this report must include as follows in summary:

a) The total quantity of each type of goods,

b) The actual total embedded emissions,

c) The total indirect emissions

d) The carbon price due in a country of origin for the embedded emissions in the imported goods

The total quantity must be expressed in megawatts-hours for electricity and in tonnes for other goods. The actual total embedded emissions should be expressed in tonnes of CO2e emissions per megawatt-hour of electricity or for other goods in tonnes of CO2e emissions per tonne of each type of goods.

It should be implied that one of the main differences in transition phase reports is the lack of need for verification.

B. Application For The Authorisation

When the transition phase ends, only authorised CBAM declarants will have permission to import into the Union's customs territory from 1 January 2026, as stated in CBAM Article 4. Therefore, these importers shall apply to become authorised CBAM declarants in order to continue importation. Applications can be made via the CBAM registry from 1 January 2025.

V. Definitive Obligations From 2026

A. Declaration Obligation

In accordance with the requirements of this obligation, authorised CBAM declarants must submit annual declarations. The declaration must be submitted by the end of May of the following year. The authorised CBAM declarants shall submit the declaration to the CBAM registry. Therefore, the first annual declaration should have been submitted by the end of May 2027. The information that should have been included in the declaration is regulated in Article 6(2). According to Article 6, the declaration must include the following points:

a) The total quantity of each type of goods imported during the preceding calendar year,

b) The total embedded emissions in the goods

c) The total number of CBAM certificates to be surrendered

d) Copies of verification reports

B. Purchase and Surrender Obligation

At the end of the transitional period, declarants will face financial obligations. As mentioned above, after the transition period, only CBAM declarants authorised by the Union will be allowed to import into the customs territory of the Union from 1 January 2026 in accordance with Article 4 of the CBAM. All authorised CBAM declarants must purchase and surrender CBAM certificates in the form of one certificate per tonne of carbon dioxide. For each quarter, authorised declarants must surrender at least 80% of their certificates for the total amount imported. There are two important points that should not be forgotten. The first is that if the importing country already has a carbon regime in place and has already paid for emissions, these costs can be deducted from the certificates. The second point is that CBAM is not designed to be traded. It is not possible in the system.

VI. Penalty Regime

A penalty regime has been enacted to punish certain types of incorrectness, deficiencies, etc. The penalty regime is explained in Article 26. In accordance with the aforementioned article, failure to comply with the CBAM regulations may result in the imposition of a penalty ranging from 10 to 50 euros per tonne for emissions that were not reported.

Yet the National Competent Authority provides an additional chance as a correction procedure in case of missing, incorrect, or incomplete CBAM reports.

Despite this last opportunity, the National Competent Authority shall apply penalties in these circumstances:

▪️ The obligatory procedures necessary to comply with the requirement of submitting a CBAM report have not been completed by the CBAM declarant.

▪️ The CBAM declarant with an incorrect or incomplete CBAM report has not taken the necessary steps after the procedure started.

VII. Potential Impacts for Türkiye

Research[1] made by the Directorate of Climate Change, which has been included by the Republic of Türkiye Ministry of Environment, Urbanization, and Climate Change, sheds light on the potential impacts of CBAM on the Turkish economy. The findings of this research indicate that the local emission trade system is highly critical. The research claims that the implementation of a local carbon pricing system, with a price of more than 50 euros per ton of carbon dioxide, could result in a reduction of costs by 1.5 billion euros on an annual basis. In 2032, iron & steel, cement, and chemical products' CBAM cost will be approximately equal to %65-70% of the standard cost. The study claims that in a scenario where the local price is set at 50 euros per carbon dioxide, the GDP of Türkiye will increase by 1 percent in 2032. Conversely, GDP is predicted to decline by 0.04. It is important to highlight that CBAM will impact Türkiye's overall export volume to the EU. If the local emission price is not adapted, it is likely to decline. Furthermore, the local emission trade system is expected to reduce emissions by between 14% and 34%, depending on the carbon price. Additionally, the national emission trade system also supports the country's decarbonization.

You can access the research with that link.

VIII. Essential Steps for Corporates

Firstly, unexpectedly, importers will want to learn about the emissions of listed goods from producers. If the importer cannot obtain any information about these goods' emissions, the emission will be counted as the default value. As easily guessable, importers shall import from more low-emission producers than default ones. Therefore, producers need to gain and gather data about their emission values. With that perspective, producers will gain an advantage by reporting their real, verified emissions with MRV (Measurement, Reporting, and Verification). These producers shall:

▪️ A registration request should be submitted to the European Commission database, which will remain valid for five years.

▪️ If the goods it produces fall within the scope of the CBAM, it should determine its embedded emissions and ensure that an accredited verifier verifies the emission data.

▪️ Keep a copy of the verification report and the basis data for at least four years after verification. The information should be sufficiently transparent and detailed.[2]

It would be beneficial for producers to consider their own position with regard to the responsibility of CBAM, whether that be direct or indirect.  If they are responsible, they should calculate embedded and direct emissions. It is essential to determine the emissions that the producer is responsible for, not only in terms of sectors but also with regard to all ingredients. It is important for producers to consider ways of minimizing their costs and greenhouse gas emissions in light of the forthcoming CBAM. They should adopt policies designed to calculate and reduce greenhouse gas emissions. In order to prepare for the definitive CBAM period, it is essential to examine the potential costs and effects in detail. Therefore, financial planning should be a priority. In order to understand the potential for unforeseen risks and circumstances, risk management is a critical factor. It is important not to underestimate or ignore the importance of risk management. Sustainability is also a key factor.

References

▪️ Sınırda Karbon Düzenleme Mekanizması (SKDM). (n.d.). https://www.ab.gov.tr/sinirda-karbon-duzenleme-mekanizmasi-skdm-_53747.html

▪️ Yeşil Mutabakat Eylem Planı ve Çalışma Grubu. (n.d.). https://ticaret.gov.tr. https://ticaret.gov.tr/dis-iliskiler/yesil-mutabakat/yesil-mutabakat-eylem-plani-ve-calisma-grubu

▪️AB sınırda karbon düzenlemesi yürürlüğe girdi. (n.d.). Carbon Gate. https://www.carbongate.io/blog/sinirda-karbon-duzenlemesi-yururluge-girdi-sirketler-icin-rehber#:~:text=SKDM%2C%20ithalat%C3%A7%C4%B1%20%C5%9Firketlere%20karbon%20emisyonlar%C4%B1n%C4%B1,rekabet%20ortam%C4%B1%20sa%C4%9Flama%20amac%C4%B1%20g%C3%BCtmektedir.

▪️ Demir, Z. (2023, September 19). Avrupa Birliği Sınırda Karbon Düzenleme Mekanizması (SKDM). KPMG. https://kpmg.com/tr/tr/home/gorusler/2023/09/sinirda-karbon-duzenleme-mekanizmasi.html

▪️ Budak, T. H., & Budak, T. H. (2023, May 12). Sınırda Karbon Düzenleme Mekanizması uygulamaya geçtiğinde şirketlerimizi ne bekliyor? - Yeşil Büyüme. Yeşil Büyüme - Karlı, Sürdürülebilir, Çevreci. https://yesilbuyume.org/sinirda-karbon-duzenlemesi-mekanizmasi-uygulamaya-gectiginde-sirketlerimizi-ne-bekliyor/

▪️ CBAM – New Obligations and Penalties under the EU’s Carbon Border Adjustment Mechanism to Take Effect on 1 October 2023 | Gleiss Lutz. (n.d.). Gleiss Lutz. https://www.gleisslutz.com/en/news-events/know-how/cbam-new-obligations-and-penalties-under-eus-carbon-border-adjustment-mechanism-take-effect-1-october-2023

▪️ Carbon Border Adjustment Mechanism. (n.d.). Taxation and Customs Union. https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

▪️ CBAM: current and future obligations for importers of certain carbon-intensive goods. (n.d.). Stibbe. https://www.stibbe.com/publications-and-insights/cbam-current-and-future-obligations-for-importers-of-certain-carbon

▪️ Noerr. (n.d.). New CBAM reporting obligations: increasing bureaucracy for EU-companies. https://www.noerr.com/en/insights/new-cbam-reporting-obligations-increasing-bureaucracy-for-eu-companies

▪️ EU Carbon Border Adjustment Mechanism (CBAM). (2024, April 14). Deloitte. https://www.deloitte.com/nl/en/services/tax/perspectives/eu-carbon-border-adjustment-mechanism-cbam.html

▪️ AB SKDM bilgi notu. (n.d.). https://ticaret.gov.tr. https://ticaret.gov.tr/dis-iliskiler/yesil-mutabakat/ab-sinirda-karbon-duzenleme-mekanizmasi/ab-skdm-bilgi-notu

▪️ EU | Compliance obligations for EU CBAM. https://www.ey.com/en_gl/technical/tax-alerts/eu---compliance-obligations-for-eu-cbam

▪️ The EU Carbon Border Adjustment Mechanism (CBAM) applies now. (n.d.). https://www.dentons.com/en/insights/articles/2024/february/21/the-eu-carbon-border-adjustment-mechanism-cbam-applies-now

▪️ Sınırda Karbon Düzenleme Mekanizmasının getirdiği yükümlülükler . https://www.ey.com/tr_tr/insights/tax/sinirda-karbon-duzenleme-mekanizmasinin-getirdigi-yukumlulukler