The transitional period for the European Union’s (the “EU”) Carbon Border Adjustment Mechanism (“CBAM”) began on October 1, 2023. The transitional period will last until December 31, 2025, and will require the importers of the CBAM goods (i.e., iron and steel, aluminum, cement, electricity, fertilizers, hydrogen) to submit quarterly reports for carbon emissions. Based on the reports and information gathered during the transitional period, the European Commission (the “Commission”) is expected to refine who should be subject to CBAMs and how they should be imposed.

On July 14, 2021, the Commission published the proposal for CBAM Regulation as a part of the “Fit for 55” package (legislative packages to reduce greenhouse gas emissions by at least 55% by 2030) to avoid carbon leakage by imposing a levy on third-country imports entering the EU. The CBAM is aimed at i) decreasing the global greenhouse gas emissions; ii) supporting the objectives under the Paris Agreement; and iii) creating incentives for third countries to decrease their greenhouse gas emissions.

On May 16, 2023, the legislative procedure for the CBAM Regulation was completed, and the CBAM Regulation entered into force on May 17, 2023, one day after its publication in the EU Official Journal. In order to facilitate the implementation of the CBAM Regulation, the Commission adopted the implementing regulation applicable to the transitional period (the “CBAM Implementing Regulation”) on August 17, 2023. The CBAM Implementing Regulation entered into force on August 18, 2023, and it is applicable to all EU Member States.

The CBAM Implementing Regulation sets out importers’ reporting obligations for CBAM goods imported to the EU during the transitional period (October 1, 2023 – December 31, 2025). In addition, to facilitate the implementation, the Annex to the CBAM Implementing Regulation sets out information requirements, including the type of information to be filled out by the importer, details of information to be submitted and the production path for each CBAM good.
 

The CBAM applies to iron and steel, aluminum, cement, electricity and hydrogen originating from non-Member States of the EU. They are listed under CN codes in Annex I to the CBAM Implementing Regulation.
 

“Reporting declarant” means (i) an importer who lodges a customs declaration for release for free circulation of goods in its own name and on its own behalf; (ii) a direct customs representative who holds the authorization to lodge a customs declaration; or (iii) an indirect customs representative.

Each reporting declarant shall provide, based on the data that the operator may communicate, (i) the quantity of the goods imported in tons for other goods; (ii) the type of goods as identified by their CN code; (iii) the origin of the goods; (iv) the installation where the goods were produced; (v) production routes; and (vi) the specific embedded direct emissions of the goods, among other information, to the competent authorities. If the rules for determining data are different from the ones indicated in Annex III to the CBAM Implementing Regulation, the reporting declarant must provide additional information and description on the methodological basis of the rules used to determine the embedded emissions.

The specific embedded emissions of goods produced in an installation will be determined based on the monitoring methodology set out in Annex III to the CBAM Implementing Regulation. Until December 31, 2024, the specific embedded emissions of goods produced in an installation may be determined by (i) a carbon pricing scheme where the installation is located; (ii) a compulsory emission monitoring scheme where the installation is located; or (iii) an emission monitoring scheme at the installation, which can include verification by an accredited verifier. Until July 31, 2024, for each import of goods for which the reporting declarant does not have all the information, the reporting declarant may use other methods for determining the emissions, including default values made available and published by the Commission for the transitional period or any other default values as specified in Annex III. In addition, in case of complex goods, up to 20% of the total embedded emissions of complex goods may be based on estimations made available by the operators of the installations.

For each quarter from October 1, 2023 until December 31, 2025, the reporting declarant shall submit the CBAM reports to the CBAM Transitional Registry no later than one month after the end of the respective quarter. A reporting declarant may modify a submitted CBAM report up to two months after the end of the relevant reporting quarter. However, a reporting declarant may modify the CBAM reports for the first two reporting periods until the submission deadline for the third CBAM report.
 

If (i) the reporting declarant has not taken the necessary steps to comply with the obligation to submit a CBAM report; or (ii) the CBAM report is incorrect or incomplete, and the reporting declarant has not taken the necessary steps to correct the CBAM report after the competent authority initiated the correction procedure, Member States may impose penalties. The amount of the penalty will be between EUR 10 and 50 per ton of unreported emissions, subject to the European index of consumer prices. Higher penalties may be applied for more than two incomplete or incorrect reports or when the duration of the failure to report exceeds six months.
 

In October 2023, competent authorities were designated in each Member State to operate the CBAM. The Commission will set up a register and a common centralized platform to manage the operation of the CBAM in an integrated manner. The register is a database containing the accounts and credentials of importers, and the common centralized platform is a platform for purchasing, refunding, and canceling certificates.

The Commission will open the CBAM Transitional Registry, a safe and standard electronic database which includes common data elements for reporting, and provides accessibility, case management and confidentiality. The Commission and the Member States must appoint contact points for each electronic system for information exchange. The CBAM Transitional Registry should be used for CBAM reports and related import records. The data retention period is five years after the receipt of the CBAM reports.

The Commission may check CBAM reports to assess compliance with the reporting obligations of reporting declarants within the transitional period and up to three months after the deadline for the latest CBAM report. For indicative purposes, the Commission communicates to the Member States a list of reporting declarants established in the Member State for which the Commission has reasons to believe they have failed to comply with the obligation to submit a CBAM report. In addition, in cases where the Commission considers that a CBAM report does not contain all the information required or considers a report incomplete or incorrect, the Commission must communicate the indicative assessment regarding that CBAM report to the competent authority in the Member State where the reporting declarant is established. The CBAM Implementing Regulation explains that a CBAM report shall be considered “incomplete” where the reporting declarant has failed to report in accordance with Annex I to the Implementing Regulation, while a CBAM report shall be considered “incorrect” where (i) the data or information in the submitted report do not comply with the requirements laid down in Articles 3 to 7 and Annex III to the same Regulation; (ii) the reporting declarant has submitted wrongful data and information; or (iii) where the reporting declarant does not provide an adequate justification for the use of reporting rules other than those listed in Annex III to the same Regulation.

The competent authority of the Member State where the reporting declarant is established initiates the review and assesses the information, list of reporting declarants and indicative assessment provided by the Commission within three months from the receipt of such communication. Within the transitional period or thereafter, the competent authorities may initiate the correction procedure regarding (i) incomplete or incorrect CBAM reports or (ii) failure to submit a CBAM report.

The CBAM Implementing Regulation clarifies that information obtained in connection with a report that is confidential or provided in confidence is subject to professional confidentiality obligation.
 

Prior to the actual implementation of the CBAM Implementing Regulation, the EU set the transitional period between October 1, 2023 and December 31, 2025. The Commission will publish 12 Implementing Acts and four Delegated Acts, based on the information submitted by the reporting declarants during the transitional period. The manufacturers of CBAM goods may use the default value published by the Commission or the estimates calculated by the companies themselves. However, they have to report the carbon emissions to the best of their ability in order for the EU to set up appropriate CBAM certificate prices, while using the transitional period to practice the calculation method of carbon emissions and to make up for shortcomings.

As reporting declarants import CBAM goods within the EU, they have to obtain carbon emissions information from their suppliers and report it to the competent authorities. Companies that are required to provide this information could consider developing a system to collect and manage the information in advance. Reporting declarants may need to be prepared for cases where they might not receive the necessary or correct information and are unable to fulfill their obligations under the CBAM Implementing Regulation. It may be beneficial for companies with reporting obligations to demonstrate that they have made their best efforts to comply with their reporting obligations, such as by including an obligation to provide information in their purchasing contracts, or by keeping records of cases where they have requested information but have not received it in a timely manner. They may also consider realigning their supply chains with transparent suppliers to facilitate this process. Additionally, developing low-carbon emission technologies may help to mitigate the financial burden of having to purchase certificates for future emissions.

In addition, the transition period prior to the full implementation of the CBAM is intended to serve as a “learning period” not only for the companies with reporting obligations, but also for the EU and Member State authorities enforcing it. Therefore, importers and exporters could take advantage of this period to communicate their concerns about the operation of the CBAM to the Commission in an appropriate manner so that they can be properly addressed in the forthcoming implementing regulations.

[Korean Version]