EU Carbon Border Adjustment Mechanism (CBAM): what it means for Australian exporters

What CBAM is

The EU’s Carbon Border Adjustment Mechanism (CBAM) is an EU regulation designed to put a carbon price at the EU border on imports of carbon-intensive goods. This aims to ensure that imported goods face a comparable carbon cost to goods produced within the European Union.

At the definitive commencement of CBAM, the regulation will apply to imports of specific goods: cement, iron and steel, aluminium, fertiliser, electricity and hydrogen. The scope of goods covered may expand in the future.

The mechanism operates to mirror the EU Emissions Trading System (EU ETS). This means that the carbon price applied to imported goods under CBAM will be equivalent to the carbon price paid by EU producers.

Timeline

The EU’s Carbon Border Adjustment Mechanism (CBAM) is being implemented in two distinct phases. The transitional period began on 1 October 2023. During this phase, Australian exporters of covered goods will be required to report embedded emissions data. This reporting obligation applies even though no financial CBAM payments are required during this initial period. Businesses can use the climate reporting tier checker to assess their reporting requirements.

The second phase, the definitive period, commences on 1 January 2026. This marks a significant shift, as importers will be obligated to purchase and surrender CBAM certificates that correspond to the embedded emissions of the covered goods they import. This represents the financial component of the CBAM.

Future expansion of the CBAM is anticipated. The EU is currently considering extending coverage to additional sectors in subsequent phases.

What Australian exporters must provide

Australian exporters of covered goods destined for the EU will be required to supply verified embedded-emissions data to EU importers. This data relates to the greenhouse gas emissions associated with the production of those goods.

The provision of verified data is crucial for Australian exporters seeking to claim a deduction from the CBAM levy. This deduction recognises carbon pricing already incurred in Australia, such as through participation in the Safeguard Mechanism for relevant facilities.

Failure to provide verified data will result in EU importers utilising default emissions values. These default values are generally higher than actual emissions, leading to increased CBAM costs that will likely impact Australian exporters through reduced prices or a loss of orders.

Australia's policy response

The Australian Government is considering the implications of the EU Carbon Border Adjustment Mechanism (CBAM) through a Carbon Leakage Review. This review is assessing potential responses to CBAM-style measures and their impact on Australian trade.

Australia’s existing domestic policies have some relevance to exporters facing CBAM. The Safeguard Mechanism places a carbon price on emissions from large industrial facilities, which may be considered when determining eligibility for CBAM credits.

The Australian Sustainability Reporting Standards (AASB S2 / ASRS) are also pertinent. These standards mandate the disclosure of Scope 1, 2 and phased Scope 3 emissions data, providing a framework for the verification and reporting necessary for CBAM compliance.