EU: Reporting obligations under carbon border adjustment mechanism beginning 2023

Reporting obligations will apply as of 1 January 2023 to EU imports under the carbon border adjustment mechanism regulation.

The European Parliament in March 2022 agreed to the draft carbon border adjustment mechanism regulation, thereby accelerating its ambition concerning decarbonization by targeting EU imports of carbon-intensive goods and protecting the EU market from countries with less ambitious climate goals. Read TaxNewsFlash

The carbon border adjustment mechanism levies a carbon price on the imports of target goods with the intention of equivalent carbon pricing on imports, mirroring the EU emissions trading system (ETS) for production in the EU. This is to safeguard the competitiveness for both the manufacturers of the ETS-covered goods in the EU and the importers of carbon border adjustment mechanism-covered goods in the EU, making the Customs Union attractive for those companies and countries that produce and export less emission-intensive goods.

The main objective for enacting the carbon border adjustment mechanism was to prevent carbon leakage and encourage trading countries to adopt a mechanism to tax carbon content.

Currently, only specific carbon-intensive sectors like aluminum, cement, iron and steel, fertilizers, and electricity are covered by the carbon border adjustment mechanism. However, it is foreseen that both on the listed products (based on customs commodity codes), as well as on the targeted industries, the application field will be extended. In addition to the product classification, the country of origin for the sourced products will also play a role as, for example, goods originating from European Free Trade Association (EFTA) countries are exempted.   

As of 1 January 2023, reporting obligations will apply to EU imports of the targeted products, and the imports will need to be performed by authorized declarants. Businesses will be required to report, on a quarterly basis, the embedded emissions in the imported goods (during that quarter of a calendar year), detailing both the direct and indirect emissions, as well as any carbon price effectively paid in the country of origin.

Moreover, the initially foreseen transition period for businesses to smoothly adapt to the carbon border adjustment mechanism regulations and minimize the disruptive impact on trade, which is from 1 January 2023 to 31 December 2026, may be brought forward to 31 December 2024.

The carbon border adjustment mechanism, as a new carbon pricing framework in the EU, is certain to have a disruptive influence on the companies trading in the likely growing list of covered commodities. It is also expected to have a disruptive effect on general global trade.

The latest approval of the carbon border adjustment mechanism by the European Council has rapidly evolving consequences for businesses involved in the cross-border import of goods, with greenhouse gas-embedded emissions, into the EU.

The existing list of the carbon border adjustment mechanism goods is clearly defined in the regulation including the customs classification codes. However, the “goods in scope” is the core element in the ongoing, heated debate, with the expected inclusion of more sectors and additional commodities (as with the EU ETS).

It is critical for companies and importers of the carbon border adjustment mechanism goods into the EU to remain well-informed of these developments and begin evaluating the overall influence on their business activity, which may not be limited to their customs data only. The new regulations could also affect their sourcing and supply chain. Quantifying the exposure to carbon costs, carbon border adjustment mechanism goods will inevitably become more expensive, as will the administrative costs related to this tax measure. Businesses may need to start focusing on their data elements, quality and availability and prepare for a global supply chain review of the implications of the carbon border adjustment mechanism on their business model, set-up and trade flows in order to stay competitive.

Amongst the most urgent prerequisites in order for EU companies to be carbon border adjustment mechanism compliant is the adherence to reporting obligations from 1 January 2023.

As additional products become part of the expanded scope of the carbon border adjustment mechanism, more and more businesses will need to prepare for its implementation. In order for businesses to be properly prepared for the upcoming transition period and minimize the disruption to their business models and costs, it is recommended that all EU importers to be ready for the reporting obligations as of 1 January 2023.   

Read a June 2022 report prepared by the KPMG member firm in Belgium