The EU's Carbon Border Adjustment Mechanism (CBAM) – Recent Developments and Future Outlook Part I

Over one year has passed since the deadline for submission of the first quarterly CBAM report was due on 31 January 2024. This means there are approximately ten months left of the 'transitional phase' before EU and non-EU companies importing CBAM goods into the customs territory of the Union from non-EU installation operators (the "CBAM importers") will need to purchase their CBAM certificates at the end of each quarter. However, the European Commission may seek to revise the CBAM regime as part of the EU's push to simplify compliance requirements.

Where are we in the CBAM's implementation?

The EU CBAM took effect on 1 October 2023, marking the beginning of the transitional phase. Due to the complex implementation process of the new CBAM regime, the European Commission allowed for the gradual phasing in of the CBAM rules to provide additional time for the CBAM importers, as well as the competent authorities of the EU Member States, to adapt their processes to meet their new CBAM obligations. This transitional phase will end on 31 December 2025.

During the transitional phase, the CBAM importers have reporting obligations and must submit their CBAM reports to the CBAM Transitional Registry for each quarter. However, there are no financial requirements for the CBAM importers during this period as the mechanism initially focuses on monitoring and reporting carbon emissions rather than imposing fees or financial requirements. A review of the CBAM's functioning during its transitional phase will be concluded before the entry into force of the definitive regime, meaning before the end of the calendar year 2025.

As of 1 January 2026, the CBAM regime will apply in its definitive form, meaning that the system will be fully operational, and the CBAM importers will need to declare the emissions embedded in their imports and surrender the corresponding number of CBAM certificates. From May 2026, the CBAM importers will switch to submitting a yearly CBAM declaration instead of quarterly CBAM reports.

Updates to the CBAM Transitional Registry

Since last year, the CBAM importers have been utilising the CBAM Transitional Registry in its transitional format to upload their CBAM quarterly reports. To provide the required data on their embedded emissions, the CBAM importers rely on the calculations, reporting methodology, and overall data given to them directly by the non-EU installation operator.

Starting 1 January 2025, a new portal section has been added to the CBAM Transitional Registry, enabling non-EU installation operators to directly upload and share their emissions data, reporting methodology, and details of the technical unit where production occurs. This removes the need to share this information with the CBAM importers, which can lead to delays in receiving all the mandatory information required for the CBAM quarterly reports. This addition will significantly streamline the process for both the non-EU installation operators and the CBAM importers.

In addition, from early 2025 (although the Commission's guidance does not state an exact date in 2025), the CBAM importers have the option to apply for ‘authorised CBAM declarant’ status via the CBAM Transitional Registry. However, as of 1 January 2026, it will be mandatory for the CBAM importers to be registered as an 'authorised CBAM declarant' to continue importing CBAM goods from outside of the EU, otherwise the customs authorities of the EU Member States will refuse entry of the CBAM goods into the customs territory of the Union.

Future Outlook on CBAM

Whilst still firmly in the transitional phase, the CBAM regime has been gaining recent attention from the European Commission and politicians.  In January, the European People's Party (EPP), the largest political group in the European Parliament, held a leaders' retreat in Berlin where discussions raised the possibility of delaying the definitive phase of the CBAM. The EPP issued a Statement suggesting that the CBAM, as well as other related legislation, should be "put on hold for at least two years" to create legal certainty for all companies affected, while reducing the bureaucratic burden.

Adding fuel to the fire, an earlier leaked agenda from the European Commission showed that it held a closed doors 'Simplification Round Table' on 6 February 2025 in Brussels, with the CBAM firmly on the agenda. This meeting was linked to the Competitiveness Compass published by the European Commission on 29 January 2025, which looks to turn the Draghi report into a roadmap for action. Within these action points, the Commission is preparing to simplify the CBAM for smaller market players.

Although it is not yet clear what form this simplification will take, the European Commissioner for Climate, Net Zero and Clean Growth, suggested that the CBAM obligations could be restricted to only the biggest CBAM importers who account for 95% of the emissions from CBAM goods, but equate to less than 20% of the companies in scope of the legislation. The intention here would be to reduce the administrative burden and compliance costs for most businesses without watering down the impact of the carbon border tax.

The European Commission and the French Ministries of Finance, Economics and Climate Transition held a high-level conference on "Addressing Carbon Leakage to Strengthen Global Climate Action" in Paris on 12 February 2025. The EU continues to show commitment to its European Green Deal and insists that the definitive phase will go ahead as planned in 2026. However, the CBAM is included in the Commission's simplification plans with proposals to revise the current de minimis threshold of €150 per consignment to remove the reporting requirement for those smaller consignments. It is not yet clear from the Commission whether the CBAM simplification proposal will be included in the first 'omnibus package' of simplified legislation expected on 26 February 2025.

However, until any amendments to the CBAM legislation have been formally debated and approved by the EU institutions, companies of all sizes currently falling within the scope of the CBAM legislation should continue to focus on compliance with implementation of the CBAM obligations during the transitional phase and continue with its preparations for the CBAM regime to be fully operational by 2026.