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September 24, 2024
How CFOs Can Prepare for the EU’s Carbon Border Adjustment Mechanism Regulation
The EU’s Carbon Border Adjustment Mechanism (CBAM) is a landmark regulation aimed at reducing carbon emissions by placing a carbon price on imports, starting with high-emission sectors like cement, steel, and aluminum. This new rule ensures that imported goods are held to the same carbon standards as EU-produced products, preventing carbon leakage. CFOs must prepare for the changes by collaborating with suppliers, implementing carbon accounting systems, and budgeting for increased costs. The CBAM will demand strategic shifts toward supply chain sustainability and investments in low-carbon technologies. Oren’s Sustainability Hub provides solutions to help businesses streamline GHG management and comply with sustainability regulations like CBAM.
The European Union (EU) has introduced the Carbon Border Adjustment Mechanism (CBAM) to curb carbon emissions and ensure that its climate goals are met without being undermined by imports. This regulation marks a significant shift in how businesses must approach carbon management and sustainability. Here’s how Chief Financial Officers (CFOs) can effectively prepare for and navigate this new regulation.
Understanding the Carbon Border Adjustment Mechanism (CBAM)
The CBAM is designed to address carbon leakage, which occurs when companies shift production to countries with less stringent emissions regulations, thereby increasing global emissions. This mechanism aims to level the playing field by imposing a carbon price on imports equivalent to what EU companies face under the EU Emissions Trading System (EU ETS). The goal is to ensure that the EU’s ambitious target of reducing emissions by 55% by 2030 is not compromised by less regulated imports.
Key Features of the CBAM
Coverage and Scope: CBAM applies only to imports, with no export rebates. Initially, it targets five high-emission sectors: cement, steel, electricity, aluminium, and fertilisers.
Carbon Certificates: Importers must surrender CBAM certificates, which are priced based on EU ETS allowances, to cover the embedded emissions in their imports.
Phase-In: The mechanism will replace the free allocation of EU ETS allowances gradually. It covers direct emissions (Scope 1) and certain emissions from input goods (partial Scope 3), excluding indirect emissions from electricity (Scope 2) for now.
Exemptions: Countries linked to the EU ETS are exempt from CBAM, and companies can reduce their CBAM costs if they prove that a corresponding carbon price has been paid abroad.
Steps for Companies to Comply with CBAM
1. Immediate Actions
Companies importing goods into the EU will need to start by reporting their emissions. This involves:
Quarterly Reporting: Declare the total volume of imported products and the quantity of embedded emissions, including both direct and indirect emissions.
Preparation for 2026: From January 2026, companies will need to purchase CBAM certificates to cover these emissions. Proving that a carbon price has been paid during production can reduce the tariff to avoid double taxation.
2. Strategic Preparations
To meet CBAM regulations, companies should:
Collaborate with Suppliers: Work closely with suppliers to obtain accurate data on emissions and carbon footprints. This is crucial for reporting and compliance.
Evaluate Financial Risks: Assess the financial implications of CBAM, including potential impacts on import costs and consider relocating manufacturing to lower-emission regions or switching to low-carbon suppliers.
Enhance Supply Chain Sustainability: Detailed carbon accounting across the supply chain will become essential. Companies that manage Scope 3 emissions effectively will benefit from better equity performance, access to sustainability-linked financing, and reduced regulatory risks.
The Evolving Role of CFOs
CFOs will play a crucial role in adapting to CBAM regulations. Here’s how they can prepare:
1. Explore Low Carbon Technologies
Investment in Clean Technologies: Integrate low-carbon technologies within the organisation to reduce emissions and operational costs. This includes investing in clean energy solutions and resource recycling.
2. Promote Supply Chain Sustainability
Detailed Carbon Accounting: Undertake comprehensive carbon accounting to ensure that all supply chain activities align with sustainability goals. This will help manage risks associated with carbon costs and regulatory compliance.
3. Prepare for External Pressures
Budget for Additional Costs: Anticipate increased costs related to CBAM, including a 19% rise for steel and additional expenses for product carbon footprints (PCF). Prepare for potential expansion of CBAM coverage and its impact on the supply chain.
READ Checklist for CFOs
To streamline CBAM compliance, CFOs should follow this checklist:
Ensure: Confirm that product codes for exports are included in the CBAM scope.
Assess: Evaluate IT systems for GHG calculations to ensure they can provide the necessary data for CBAM.
Develop: Create a roadmap for CBAM reporting, including updates to GHG calculation methodologies, internal processes, and IT systems.
Future Implications and Strategic Adjustments
The impact of CBAM extends beyond carbon accounting and reporting. Companies must scrutinise their supply chains and consider new partnerships with low-emission suppliers. Investment in R&D for cleaner technologies may lead to adjustments in pricing strategies to offset increased capital and operational expenditures. CFOs will need to drive these changes, ensuring that their companies remain competitive and compliant with EU regulations.
For support in managing GHG emissions and compliance with CBAM and other sustainability regulations, such as the CSRD (Corporate Sustainability Reporting Directive) and BRSR (Business Responsibility and Sustainability Reporting), Oren’s Sustainability Hub offers comprehensive solutions.
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