New CBAM legislative proposal: Major reduction of CBAM scope and burden

CBAM’s original scope

CBAM is a carbon adjustment on the importation into the EU of designated goods based on the CO2 emissions in the production process outside the EU. CBAM was adopted on May 17, 2023 and has been gradually introduced (and in force) since October 1, 2023. The designated goods are goods falling in the following categories: iron and steel, cement, fertilizers, aluminum, electricity and hydrogen (collectively: CBAM goods).

The aim of CBAM is to prevent the risk of carbon leakage and to encourage the reduction of emissions by producers in non-EU countries. Producers within the EU have to purchase emission allowances for the CO2 emissions of their products under the EU Emissions Trading System (EU ETS). When fully implemented, the CBAM price adjustment is intended to create a level playing field and ensure that EU producers no longer face a competitive disadvantage when importing from non-EU countries with lower climate standards.

CBAM applies to importers (declarants) of designated goods. A declarant could be described as the EU equivalent to an ‘importer of record’. Specifically, a declarant for EU customs and CBAM purposes is the person lodging a customs declaration in their own name and on their own behalf or, in case of indirect customs representation, the person on whose behalf a customs declaration is lodged.

Current de minimis exemption

Under the current CBAM rules, small quantities of imported CBAM goods may be automatically exempt from the CBAM reporting obligation provided the de minimis exemption applies. The de minimis exemption applies to consignments in which the total intrinsic value of the CBAM goods does not exceed EUR 150. Therefore, the overall value of the total CBAM goods in one consignment has to be considered, and if that value is above EUR 150, then the de minimis exemption does not apply. EU guidance confirms that for the exemption it is not relevant if different types of CBAM goods are imported in one consignment. If the overall value is above EUR 150, the de minimis exemption does not apply and the consignment must be reported.

Transitional period ends by 2025

Currently, a transitional period is still ongoing which will end on December 31, 2025. During the transitional period importers are required to comply with a quarterly reporting requirement of a CBAM report. The CBAM report specifies the imported designated CBAM goods and embedded CO2 emissions in the reporting period.

From January 1, 2026 onwards, CBAM is set to enter into the definitive regime whereby importers must be approved as ‘CBAM declarants’ in order to import CBAM goods. Furthermore, importers are required to hold (and thus purchase) at the end of each quarter CBAM certificates corresponding to at least 80% of the embedded CO2 emissions in all CBAM goods imported since the start of the year. An annual CBAM declaration would be filed by May 31 of the subsequent year.

The price of the certificates will be based on the weekly average auction price of the EU ETS. Furthermore, importers will have to declare the emissions embedded in their imports via an annual CBAM declaration and have to surrender the corresponding number of certificates.

According to one of the preambles of the Regulation, CBAM should initially apply to direct emissions of greenhouse gases from the time of production of the CBAM goods until the import of those goods into the EU. The same preamble notes that CBAM should also apply to indirect emissions; emissions arising from the generation of electricity used to produce the CBAM goods. The Regulation lists various CBAM goods for which only direct emissions are to be taken into account.

Proposed CBAM amendments

As noted, the proposal covers over twenty changes to the Regulation. In our view, the most notable changes of the Regulation are as follows:

• Replacement of de minimis exemption: The EUR 150 threshold is replaced by a mass-based threshold of 50 tonnes of net mass. According to the Commission, the threshold is set at a level which ensures that at least 99% of the emissions embedded in the import of goods will still fall within the CBAM scope while simultaneously exempting around 90% of the importers from CBAM obligations.
• Postponement of the sale of CBAM certificates: The start date of the sale of CBAM certificates is moved to February 2027, de facto extending the transition period, although the article governing the transitional period remains unchanged. . This change allows businesses more time to make the necessary preparations. The postponement according to the proposal is “to address significant uncertainties related to the year 2026”.
• Reduction of CBAM certificate ratio: The CBAM certificate obligation ratio of 80% is reduced to 50% to further tailor the provision to “the expected financial adjustment and to integrate the free allocation of EU ETS allowance”. This change should make it easier, and financially less burdensome, to ensure sufficient CBAM certificates are obtained on a quarterly basis following February 2027.
• Changes annual CBAM reporting deadline: The annual CBAM filing deadline is changed from May 31 to October 31.
• Changes in penalties: The proposal expands on the existing penalty provisions, introducing the ability of the competent authority to decrease the penalty amount based on various factors including the extent of the unreported information, the level of cooperation, the readiness, the unintentional nature of the behavior and the past compliance of the authorized CBAM declarant. In case a penalty is imposed on a person other than an authorized CBAM declarant, the payment of such penalty now will release the person from the obligation to submit a CBAM declaration or surrender certificates. This is (still) not the case for penalties imposed on authorized CBAM declarants, where the payment does not release the declarant from the obligation to surrender the outstanding number of CBAM certificates in a given year.
• Changes in monitoring: The proposal adds a dedicated provision to the CBAM Regulation, stipulating the competent authorities and Commission shall monitor the import of CBAM goods. The provision provides for a periodic and automatic exchange of information by the Commission with the competent authorities for the monitoring of importers in the CBAM registry. In addition, it is indicated that the Commission can make ‘preliminary assessments’ on whether an importer exceeded the mass threshold and that the competent authority can request documentary evidence from the importer, the customs authorities or the Commission to determine the correctness of the assessment.
• Artificial splitting shipments: Currently, splitting shipments into consignments with the aim to circumvent the de minimis threshold is seen as circumvention for which the Commission is to take action (e.g. in case of circumvention by slightly modifying the goods imported the Commission may amend the list of CBAM goods, thereby expanding the CBAM scope). Under the proposed legislative changes this remains the case, with the text updated to reflect potential splitting of shipments with the purpose of circumventing the mass threshold.
• Emissions taken into account for electricity: Noting indirect emissions are not relevant in the case of electricity generation, electricity is added to the list of CBAM goods for which only direct emissions are to be taken into account in the calculation of the embedded emissions.
• Exclusion of non-calcined kaolinic clays: The proposal seeks to exclude non-calcined kaolinic clays from the CBAM scope as such clays are, according to the Commission, not carbon-intensive products. Calcined kaolinic clays are carbon-intensive and therefore would still fall within the CBAM scope. Specifically, in the category ‘Other kaolinic clays’ as a subset of cement goods.

Practical guidance

Changing from a de minimis monetary threshold to a mass threshold is in our view a welcome change. As noted, according to the Commission this would exempt around 90% of the importers of CBAM goods from the CBAM obligations. For businesses importing CBAM goods into the EU it is therefore important to assess whether they benefit from the new exemption or are part of the 10% of importers still in scope of CBAM.

If below the mass threshold, continuously monitoring is required to check that the 50 tonnes annual threshold is not exceeded in any given calendar year. In this respect, it should be emphasized that it artificially splitting shipments to avoid exceeding the mass threshold would be considered circumvention and addressed by the Commission accordingly – see before.

Initially, the proposed legislation was reported on various media outlets as a postponement of CBAM for another year. However, the transition period has not changed under the proposal, so that the requirement under the definitive CBAM regime of having CBAM certificates still applies. As such, the postponement of the sale of the CBAM certificates, while welcome, can be described as a deferral of payment for the CBAM certificates and therefore only a temporary cash flow benefit. Similarly, the reduction of the CBAM certificate ratio from 80% to 50% would provide some financial relief.

While the Regulation has direct effect (i.e. it does not need to be transposed into national law), it remains to be seen how the various EU authorities will enforce the CBAM rules, and in particular the penalty provisions. The relevant respective clause is phrased in a discretionary way (“The competent authority may decrease the amount of the penalty …”). The option for the EU authorities to decrease the penalties based on various circumstances could still be beneficial for businesses which are unintentionally non-compliant. Furthermore, conversely, intentional non-compliance could result in a penalty up to five times the so-called excess emissions penalty.

In summary, CBAM is not postponed and the transition period will end on 31 December 2025. As such, the legislative changes should be a reminder for businesses looking to import CBAM goods into the EU to check whether they benefit from the mass exemption or they should start preparing for the CBAM definitive regime. As a closing thought, CBAM may also affect businesses not importing CBAM goods themselves. If such businesses have counterparties who do import CBAM goods, the increased cost of import may impact prices in general.