The EU Directive on CO2 emissions continues to raise fundamental operational questions within the business community, despite companies already being subject to official reporting obligations.
As of October 1, 2023, the world’s first climate import tax—the Carbon Border Adjustment Mechanism (CBAM)—has come into effect. This system imposes tariffs on a range of carbon-intensive products imported into the EU, such as cement, steel, aluminum, and fertilizers, unless the exporting countries implement their own domestic taxes for the associated carbon emissions.
Currently, the system is limited to data collection, with taxation set to begin in 2026. However, CBAM presents a complex challenge for companies.
In recent meetings, a partner asked: “Suppliers are sending ISO 14067 documents. Did I understand correctly that these cannot be used?” ISO 14067 is the current global standard for quantifying CO2 emissions associated with products, but it is not integrated into CBAM reporting. This is just one of many details complicating compliance with reporting for the next quarter.
Another partner asked: “Can a non-EU company perform CBAM reporting if it has a local VAT registration in the EU?” The answer is no. However, if the company designates an entity for reporting, this entity can manage reporting in all EU countries on behalf of the company.
The confusion is not limited to these questions. In a letter to EU officials, the International Chamber of Commerce (ICC) highlighted “serious compliance challenges faced by companies of all sizes” due to the 27 national authorities to whom businesses must report data. The process has also been hampered by “technical issues” that have hindered system access and generated additional errors. For example, in Germany, the platform was offline for several weeks after the CBAM introductory period began due to the lack of a responsible authority, and many companies were unable to register for months. Additionally, the threshold of €150 to be considered an importer of CBAM goods is seen as too low, with hopes for future adjustments.
In the coming period, the European Commission will be busy with preparations before the system begins taxing importers.
In the third quarter of 2024, non-EU companies wishing to authorize a representative for reporting will receive “the conditions and procedures to follow.”
A second law, expected at the same time, will “establish the infrastructure and practical modalities of the IT system.” The IT systems through which companies must report their data have been largely operational since October 1, 2023.
Key steps to follow include a report due by the end of the year that will analyze the possibility of extending CBAM to “downstream” products such as automobiles, semi-finished goods, or other products that include a large portion of the primary products already covered by CBAM. This extension is considered essential by observers but is expected to make the system even more complex. EU Climate Commissioner Wopke Hoekstra has expressed openness to considering this idea.
Additionally, in the second half of 2025, the European Commission will examine the possibility of excluding electricity from the system. A third report will assess the potential impact of the system on industries in neighboring, less advantaged countries.