Understanding the European Carbon Border Adjustment Mechanism and Implications for Nigerian Businesses
The world’s first carbon border tax is about to commence, starting from October 1 2023.
The world’s first carbon border tax is about to commence, starting from October 1 2023. As your reliable source for energy updates, it is our responsibility to keep you well-informed about the intricacies of this innovative greenhouse gas emissions reduction approach. This includes understanding its objectives, preparing your companies, and comprehending the implications it holds for businesses in Nigeria. You can download here.
The European Union’s Carbon Border Adjustment Mechanism (CBAM) Regulation entered into force on May 17, 2023 and commences its transitional phase on October 1, 2023 where all businesses within the EU importing “CBAM goods” commence their inaugural reporting under the framework and operate under the fiscal obligations that follow. Before we delve into the few specific details of the CBAM, it is pertinent to examine what a CBAM is, what CBAM goods are, and the problem a CBAM aims to solve.
The EU CBAM
The CBAM Regulation came as an attempt to counter a loophole in the EU emissions trading scheme (EU ETS). The EU ETS is a cap-and-trade system which places a cap or limit on the total amount of greenhouse gases that can be emitted by certain sectors of the economy, primarily energy-intensive industries and power generation. The loophole in the EU ETS is the creation of an incentive for emission intensive production firms to move outside the EU to countries with weaker emissions reduction regulations where their products will not be subject to the EU ETS. The term used to describe this phenomenon is ‘carbon leakage’.
The implementation of carbon border adjustments is a policy approach to address carbon leakage. CBAMs impose a carbon price on imported goods based on their embedded carbon emissions. This aims to ensure that foreign producers face a similar cost for their carbon emissions as domestic producers.
Under the EU CBAM, importers will be charged a tariff on certain products, beginning with iron, steel, aluminum, cement, clinker, lime, electricity, hydrogen, and fertilizer, incurring a tariff when imported into the customs territory of the EU. The concept behind this approach is to bridge the gap between the carbon price in the exporting nation and carbon price in the EU. This is achieved by imposing the difference as a cost on the importer. In cases where the exporting country lacks a carbon pricing or tax scheme, a tariff equivalent to the entire carbon cost within the EU will be imposed on products similar to those being imported at the EU's borders.
Scope – “CBAM Goods”
The CBAM goods are the list of goods that importers need to monitor for their carbon content when importing from non-EU countries. They include goods in the following categories: Aluminium, Iron and steel, fertilizers, ammonia, potassium nitrate, electricity, cement, hydrogen and iron ore. There are specifications represented by codes under each category identifying the relevant products. The common greenhouse gas to be monitored and reported is carbon dioxide.
Application Overview
The Regulation applies to listed goods originating in non-EU countries (referred to as ‘third countries’) where those goods, or processed products from those goods resulting from the inward processing procedure are imported into customs territory of the EU.
The Regulation also applies to listed goods originating in non-EU countries, where those goods, or processed products from those goods resulting from the inward processing procedure are brought to an artificial island, a fixed or floating structure, or any other structure on the continental shelf or in the exclusive economic zone of a Member State that is adjacent to the customs territory of the EU.
The Regulation does not apply to goods originating from the following countries and territories: Iceland, Liechtenstein, Norway, Switzerland, Busingen, Heligoland, Livigno, Ceuta and Melilla,
Implementation Timeline
Beginning on October 1, 2023, and continuing until December 31, 2025, the Carbon Border Adjustment Mechanism (CBAM) will enter a transition phase. During this phase, specific importers or their designated representatives will be obligated to submit quarterly reports concerning the products they import. These reports will comprise information regarding the emissions integrated into the imported goods and the carbon pricing structures in the respective countries of origin. The full implementation of the CBAM system is scheduled for a launch on January 1, 2026.
After the transitional phase, Only authorized ‘CBAM declarants’ will have the right to import specific goods into the EU. Potential declarants can apply for this status starting December 31, 2024. In 2027, for the data from 2026, those responsible for declaring under the Carbon Border Adjustment Mechanism (CBAM) will be required to provide an annual submission no later than May 31st. This submission should contain exhaustive information regarding the carbon emissions associated with their imported products, and it must be accompanied by verification reports from accredited entities.
There is also a provision for declarants to purchase CBAM certificates. The certificates are electronic tokens equivalent to one tonne of CO2 emissions from their imports, and they represent the cost of the emissions embedded within the imported goods. In addition, there will be an expansion of the listed goods under CBAM to include all goods currently under the EU ETS.
Implications for Nigerian Businesses
In spite of the enactment of the Nigerian Climate Change Act, the formulation of energy transition plans, and statements of intent by the National Council on Climate Change (NCCC) to operationalize the Act, Nigeria has not made substantial progress in implementing comprehensive climate regulations. It is noteworthy that Nigeria presently lacks a carbon tax framework or emissions pricing mechanism. Consequently, numerous Nigerian businesses dealing with exporting goods to the EU may encounter challenges in conforming to the requirements in the EU Carbon Border Adjustment Mechanism (CBAM) Regulations. This underscores an often unpopular reality, which is that while African nations need not entirely forsake fossil fuels, they should nevertheless implement climate regulations that facilitate the adaptation of domestic businesses to prevailing global climate mandates.
Assessing the carbon emissions associated with products, encompassing the entire lifecycle from raw material extraction to production, manufacturing, and transportation, necessitates intricate calculations and comprehensive data collection procedures. In response to this, Nigerian businesses will face challenging decisions. The available choices may include absorbing the CBAM-related costs, potentially impacting profits, intensifying research and development efforts, restructuring production methods and inputs, enhancing pollution control measures, transferring costs to suppliers and consumers, making substantial adjustments to business models and supply chains, or adopting a blend of these strategies.
The NCCC and other relevant government agencies ought to start making plans with stakeholders to enable Nigerian businesses prepare for the CBAM.
For expert guidance to ensure your business maintains compliance and competitiveness within the framework of CBAM, please do not hesitate to reach out to our specialists. You can contact us at hello@fortroseconsulting.com