The European Commission (“EC”) announced 13 interlinked legislative proposals called the “Fit for 55” package, aiming to reduce greenhouse gas (“GHG”) emissions by at least 55% by 2030, compared to 1990 levels. One of the proposals is the Carbon Border Adjustment Mechanism (“CBAM”).
 
Products that are produced within the European Union (“EU”) are subject to the EU’s emission trading scheme (“EU ETS”). In order to prevent carbon leakage resulting from businesses relocating production sites to outside of the EU where the EU ETS does not apply, the CBAM imposes a “border tax adjustment” on products that are imported into the EU so that they bear the same level of carbon price as the goods that are produced within the EU.
 
Accordingly, on May 17, 2023, the CBAM Regulation was enacted. Before taking full effect on January 1, 2026, the CBAM Regulation entered into a two-year transitional period.
 

• In general, products that are subject to the CBAM are largely classified into iron and steel, aluminum, cement, fertilizers, electricity, hydrogen, and related complex goods. Whether a product that is imported into the EU is subject to the CBAM can be determined based on the CN codes listed under Annex 1 (“List of Goods and Greenhouse Gases”) (Link).
   

The First Reporting Deadline under the CBAM

The transitional period runs from October 1, 2023 to December 31, 2025. During this transitional period, the EU importers are only responsible for calculating and reporting the GHG emissions embedded in the products subject to the CBAM on a quarterly basis. Accordingly, the deadline for the first reporting period under the CBAM falls on January 31, 2024. This means the EU importers (or customs agents) of CBAM products must report the embedded GHG emissions from October 2023 to December 2023 to the CBAM conversion register by January 31, 2024 (i.e., first reporting deadline).
 

• When the CBAM Regulation takes full effect on January 1, 2026 (i.e., definitive period), the EU importers (or customs agents) must (i) obtain approval for registering as an authorized “CBAM Declarant,” (ii) report the embedded GHG emissions in the imported CBAM products every year, and (iii) purchase and submit a CBAM certificate corresponding to the carbon price that would have been paid (had the goods been produced under the EU’s carbon pricing rules).
   

Any EU importers (or customs agents) that fail to comply with the reporting obligation during the transitional period may be subject to an administrative fine (approximately EUR 10 to 50 per ton as determined by the competent authorities). For repeated violations, it is possible for the regulators to refuse authorizing such violators as a “CBAM Declarant” for the definitive period, thereby restricting their importation of CBAM products into the EU. Thus, it is necessary to ensure that the EU importers (or customs agents) fulfill their reporting obligations during the transitional period.
 
The table below shows the key differences between the “reporting obligation during the transitional period” and the “reporting obligation during the definitive period.” In short, the reporting obligation during the transitional period is more lenient overall, while it is stricter in terms of frequency and scope. This is because the EC must collect necessary information during the transitional period.
 

Publication of Guidance on Default Values
 
On December 22, 2023, the EC published a guidance on default values titled “Default Values for the Transitional Period of the CBAM between October 1, 2023 and December 31, 2025” (“Guidance”). This Guidance can be used to calculate embedded emissions for the reporting obligation during the transitional period.
 
During the transitional period, the Guidance allows EU importers (or customs agents) to (i) report embedded emissions based on default values until July 31, 2024 (i.e., during the first three quarterly reports), and (ii) report embedded emissions based on the default values for complex goods for up to 20% of the total embedded emissions from Q3 2024 until the end of 2025.
 
In order to determine the embedded emissions using the relaxed methodology described as (i) and (ii) in the table above, the default values for direct, indirect, and total emissions by CN codes (in CO₂e/ton) can be used as presented in the Guidance. Please refer to the table in the Guidance (pages seven through 23 of the attached file) for the default values.

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