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CO2 tax on imports to the EU from 2023

Monday 13/09/2021

In July, the EU published the details of the CO2 tax. Undoubtedly, this will have an impact on many logistics networks. It is important for Supply Chain managers to be prepared for this.

CO2 tax on imported goods will transform global Supply Chain networks

The Green Deal aims to make the EU climate neutral by 2050. The first milestone: by 2030, reduce CO2 emissions by 55% compared to 1990 levels. Of course, the EU wants to avoid a situation where its climate ambitions simply drive industrial activity to parts of the world with less strict environmental standards (so-called carbon leakage). With this in mind, the EU will guide its economy through the green transition under the protective wing of the Carbon Border Adjustment Mechanism (CBAM). This will involve the introduction of a carbon tax on imported goods. In other words, there will be a carbon supplement attached to goods entering the EU.

Functioning of the CBAM

In concrete terms, importers will have to declare the CO2 footprint of their goods, possibly as an extension of existing customs procedures. Only an ‘authorized declarant’ can import the products. The details of the necessary mechanisms – the calculation method, for example – are still being finalized and they are due to come into force by January 2023.

This tight timeline means importers need to accelerate the mapping out and fine-tuning of the CO2 administration of their logistics flows. Although importers are (partly) dependent on information they receive from third parties (overseas producers or an accredited declarant, for example), for these CO2 calculations, the EU is currently sticking to its ambitious timeline.

What is the exact CBAM timeline?

As early as 1 January 2023, the EU wants to start with a transitional phase. In this phase, companies will have to comply with the new administrative procedures and provide a CO2 report for the goods they import.

It is expected that importers will be effectively taxed on the import of a number of specific product categories from 1 January 2026. In other words, that’s when the CO2 tax will actually take effect and likely lead to price corrections. Before that can happen, the European Parliament and the European Council have to approve the legislation – which has to be compliant with the WTO rules (World Trade Organisation). There are still a few hurdles to take but we expect little delay. The CBAM also has to be approved by the World Trade Organization (WTO).

Which products will be subject to the CBAM?

Initially, carbon-intensive commodities will be targeted. The CBAM will apply to direct emissions released during the production of aluminum, cement, iron, steel, electricity, and fertilizer. It will cover only direct emissions released during the production process and not (for the time being) those related to downstream products that use these resources. However, the EU Commission has indicated that it will review extending the scope to cover more products and services, as well as so-called indirect emissions.

To which countries do these rules apply?

The proposal covers imports into the EU from all non-EU countries except the EEA countries and Switzerland.

Clearly, the impact of the CBAM on global Supply Chain networks should not be underestimated, and we recommend that business leaders and Supply Chain managers take the following actions:

  • Strategically evaluate your Supply Chain network and its capabilities
    - Build a detailed understanding of your end-to-end Supply Chain. Accurately document the country of origin and customs codes of all goods your organization imports into the EU.
    - Determine the financial impact of the CBAM based on the current Supply Chain. Take appropriate action to reduce the financial impact by reviewing the Supply Chain network and sourcing strategy.
    - Although the CBAM will initially only apply to specific commodities, the general expectation is that over time indirect carbon emissions from imported consumer products will also be included. Take this into account.
  • Efficiency in planning and production
    - Investigate whether you can achieve a reduction in emissions by improving the Supply Chain and production planning and/or by making technical improvements to your production process.
  • Be prepared for extra work in terms of trade compliance
    - Calculate the embedded emissions of the goods you import into the EU and which are covered by the CBAM regulations. You might want to do this in partnership with the manufacturer.
    - Assess the impact on your organization of the compliance and reporting obligations required by the CBAM regulations.

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Joël Wijns

Joël Wijns

Supply chain; sector life science

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