How Companies are Preparing for the Impending EU Carbon Border Tax and Red Tape

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Businesses are preparing for the impact of the world’s first carbon border tax, a measure that will impose significant administrative costs on importers into the EU. As protectionist trade measures continue to rise globally, companies are bracing themselves for the red tape that will cost millions.

The carbon border adjustment mechanism (CBAM), which goes into a trial phase on October 1, is estimated to cost companies up to €27mn per year to administer, according to the European Commission. However, the actual cost remains uncertain due to the extensive paperwork and changes to current contracts and procedures. Reporting documents obtained by the Financial Times reveal complex forms with 10 sections to fill in for each importer.

The purpose of the levy is to equalize costs for European producers, who face increasing charges for greenhouse gas emissions under the emissions trading system, with businesses importing into the EU. It covers several industries, such as iron, steel, cement, aluminium, fertiliser, hydrogen, and electricity generation. The full implementation of the carbon border tax is scheduled for 2026, after the trial phase.

The European Commission argues that this measure will encourage other countries to adopt carbon pricing policies, aiming to assign a value to the pollution associated with global warming and limit the annual increase in carbon emissions.

Ursula von der Leyen, President of the European Commission, has been advocating for a global carbon price at events like the UN General Assembly.

A recent study by The Conference Board highlighted potential challenges with the CBAM, including bottlenecks for importers due to staffing constraints at customs authorities and a lack of expertise in verifying carbon emissions. The reporting requirements for carbon emissions must be fulfilled quarterly, which further adds to the burden for European businesses and necessitates significant investments in carbon reporting systems for non-EU exporters.

According to the study, only 105 verifiers are available in the EU, and six member states have none at all. More than 80% of surveyed businesses anticipate price increases for their customers as a result of the levy.

For suppliers from countries outside the EU, compliance with the scheme means recording and reporting emissions resulting from their production processes by January 31. Failure to meet reporting requirements during the trial phase can result in penalties of up to €50 per tonne of carbon emissions. The cost of the levy, starting from 2026, will be based on the EU’s own carbon price, which is currently approximately €85 per tonne.

Adolfo Aiello, Deputy Director-General in Climate and Energy at Eurofer, the steel industry body, expressed concerns about the imposed penalties, stating that they are not sufficient to prevent circumvention of the tax. Importing materials like iron and steel after they have already been manufactured into consumer goods could be a way for companies to avoid paying the tax.

About 350 steel products are subject to the CBAM, the highest number for any sector. Aluminium follows with 58 products included, according to industry executives.

An EU official stated that the exact number of businesses required to report under the scheme is currently unknown, emphasizing that verification will not commence until 2026.

Countries affected by the carbon border tax, including China, India, and Turkey, have expressed objections. Beijing has requested talks at the World Trade Organization regarding the measure.

The EU official defended the non-discriminatory nature of the levy as compliant with WTO rules, asserting that it will not harm the competitiveness of EU businesses.