Introduction of the CBAM: the new environmental duty desired by the EU is in force

The carbon border adjustment mechanism, better known by the acronym CBAM (Carbon BorderAdjustmentMechanism), represents one of the tools adopted by the European Commission to achieve the (binding) objectives set within the context of climate policies.

The achievement of climate neutrality by 2050 has led the community legislator to update and adapt the current legislation and related instruments, identifying intermediate targets through the Fit for 55 "package" which, as is known, increases the EU's climate commitments to 2030 by providing a reduction of climate-altering gases by 55%, distributing this objective among all the sectors involved and the various active policies at European level.

The objectives of the CBAM

The CBAM is a fundamental element of the Fit for 55 "package" which introduces a new tool created, first and foremost, to combat a real problem: the risk of delocalization of carbon emissions (so-called carbon leakage). Given the large number of the EU's international partners implementing significantly less ambitious climate policies, the community legislator had to identify a mechanism capable of preventing decarbonisation efforts within Europe from being undermined by greater emissions outside the community and this is why it chose to adopt CBAM.

The free allocation of allowances under the EU (CO2) Emissions Trading System (EU ETS) and financial measures to offset indirect emissions costs incurred against the costs of emissions of greenhouse gases transferred to electricity prices, have been valid strategic tools to combat the risk of carbon leakage but, today, they are no longer sufficient in view of the climate ambitions for 2050. For these reasons, the CBAM will replace these instruments by restoring a situation of fairness with the aim of guaranteeing, on the one hand, a carbon price of imports equivalent to the carbon price of internal production and, on the other hand, taking into account - when calculating embodied emissions (so-called embedded emissions) – of any carbon price already actually paid in the country of origin of the imported good.

The requirements for the introduction of the CBAM

The CBAM was established through EU regulation no. 956 of 10 May 2023, which provides for a progressive introduction of the mechanism, in line with the gradual elimination (phase-out) of free allocation under the EU-ETS mechanism, to support the decarbonisation of the European industrial sector. For these reasons, the community legislator has provided for a first transitional phase of application of the mechanism.

For 27 months, in fact, the CBAM will apply to imports of specific goods and (some) precursors, characterized by energy intensive production and at high risk of carbon leakage, i.e. cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The list of goods, classified according to their CN code (Combined Nomenclature), is included in Annex I of the regulation. The goods included in the CBAM of interest to foundries concern both the typical products of the production process (albeit numerically limited) and some raw input materials.

During the transitional period, importers - once they have acquired the status of "authorized CBAM Declarant" - must be accredited on the CBAM Transitional Register and fill out a CBAM Report on a quarterly basis, entering information regarding - in particular - the quantity of imported goods, their origin , the emissions incorporated into imported goods and the carbon price already paid in the country of origin. The embodied emissions will be calculated according to the methodologies permitted by the Implementing Regulation (EU) no. 1773 of 17 August 2023, which regulates the methods of application of the CBAM mechanism throughout the transitional period.

Furthermore, the same implementing regulation defines the calculation methods allowed to quantify the emissions incorporated in the transitional period, considering that for some goods only direct emissions are calculated while for some categories both direct and indirect emissions.

The most important element that characterizes this pilot phase is that no financial adjustment is required: importers, in fact, will not have to purchase CBAM Certificates.

A second element of flexibility concerns embedded emissions: the declared embedded emissions deriving from the production of imported goods, in fact, will not have to be verified by any verifier accredited by the national accreditation bodies.

Once this first phase has been overcome, starting from 1 January 2026, we will move on to the "full regime" application of the CBAM, with the introduction of the so-called compliance: the importer, in addition to the quarterly information communication obligations, will have to purchase and return by May 31st of each year (and for the first time in 2027, in relation to imports carried out during 2026) a number of CBAM certificates corresponding to the declared embodied emissions. The price of the CBAM certificates will be calculated based on the average price of the government auctions foreseen within the EU ETS, once again highlighting the connection between the two systems which, although distinct, have the common objective of establishing a price for greenhouse gas emissions through the use of quotas (for the ETS leEUA, European Union Allowances) or specific certificates (for the CBAM, the CBAM certificates). Furthermore, verification of declared embodied emissions will be introduced.

The impacts of CBAM and EU climate policies on the foundry sector

With reference to the foundry sector, at least as regards raw materials, with the exception of the few cases of direct imports, companies will be influenced only indirectly by the CBAM, as the communication and economic adjustment obligations will burden only on direct importers and not on the companies that buy from them. However, it will be essential to work to evaluate the extent of the impacts of the CBAM in terms of the probable increase in production costs, starting to take into consideration the volume of imports of raw materials - such as cast iron, steel, aluminum and some iron alloys - and the emissions incorporated into the aforementioned goods whose origin is, almost exclusively, outside the EU.

For foundries which, however, directly import raw materials, castings or other products among those that fall within the mechanism, it becomes crucial both to pay attention to the correct customs classification of the imported goods and to provide for the obligations required by the mechanism and, from a future perspective, identify a strategy for supply management.

For importers, in fact, determining the future cost of the CBAM Certificates is now important for planning a carbon budget and risk reduction strategy, i.e. reducing the expected cost for fulfilling the obligations deriving from the CBAM, taking into account the regulatory provisions with respect to the return of CBAM Certificates. In fact, the authorized CBAM declarant must guarantee - by the end of each quarter - to purchase a number of CBAM Certificates equivalent to at least 80% of the declared embedded emissions. This means that there is the possibility of setting up a hedging strategy, where it will be possible to purchase 20% of CBAM Certificates at a more favorable market moment.

The calculation of embodied emissions is a topic closely related to the number of CBAM certificates to be purchased and, consequently, to the economic impacts of the mechanism: the quantity of certificates to be returned, in fact, is equivalent to the declared embodied emissions. It will therefore be useful to analyze import flows not only from an "embedded emissions" perspective (with a consequent - if necessary - update of the selection criteria of its non-EU suppliers), but also by monitoring the implementation or otherwise of mechanisms of direct or indirect carbon tax in the countries of origin of the imported goods, as it will determine a discount compared to the quantity of CBAM Certificates to be purchased. The European Commission is working on the size of this discount and will be a "hot" topic in the coming months.

Conclusions on the introduction of CBAM

The EU action plan aims to promote tools and incentives inspired by the "polluter pays" principle and the CBAM, together with the ETS mechanism, fits into this context. The Commission is aware of the complexity of this new mechanism and this is why it has provided for a transitional period, with obligations on importers that do not imply either verification of embedded emissions or financial adjustment.

These months will be essential to engage suppliers in sharing the information necessary to compile the CBAM quarterly report, to analyze the impacts and risks associated with CBAM with respect to their import flows and to plan a carbon budget strategy, taking into account the forecast values and the drivers that drive the CO2 market.

Source: In Fonderia – ll magazine dell’industria fusoria italiana