Climate change is at the top of the agenda of both governments and the private sector around the world. The Carbon Border Adjustment Mechanism (CBAM), the latest step taken by the European Union on this issue, affects not only companies in Europe but all countries exporting to Europe. This move profoundly affects global trade, production and even consumption.
Turkish companies, in particular, should start determining their strategies on how to adapt to this new regulation. So, what is CBAM? Which products fall within this scope? Which sectors in Turkey will be affected by this situation? And most importantly, how should companies prepare for this process? This guide will help you find the answers to all these questions.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is a new customs regulation developed by the European Union as a step in the fight against climate change. This regulation aims to contribute to the fight against climate change by calculating the carbon footprint of products imported from non-EU countries and imposing financial obligations regarding carbon emissions. CBAM imposes responsibility on importing companies to monitor and reduce carbon emissions.
This mechanism aims to provide a fair competitive environment in terms of carbon emissions between products in the EU's internal market and imported products from third countries. It is specifically designed to ensure that goods produced in countries outside the EU and exported to the EU do not have an unfair competitive advantage due to their costs related to carbon emissions.
Europe's Challenge to Carbon Containment and Climate Change
In its fight against climate change, the European Union is doing more than setting a target to reduce carbon emissions within its borders. Within the scope of the European Green Deal (EU Green Deal) and Fit for 55, reducing emission allowances in sectors subject to the EU ETS System, making less free emission allowances, and companies in countries that do not have such an emission control system and EU companies. The Carbon Border Adjustment Mechanism (CBAM) mechanism has come into force, aiming to make the competitiveness of producers fair. Thus, while maintaining the competitiveness of the EU internal market, it aims to prevent carbon-intensive industries from moving outside the EU, causing carbon leakage, and to spread responsibility for reducing global carbon emissions.
Main Aims and Objectives of CBAM
The main goal of CBAM is to prevent carbon leaks that may be created by moving production outside of Europe and to maintain the competitiveness of EU manufacturers.
CarbonThe leakage is that carbon-intensive industries, instead of taking measures to reduce carbon emissions in their operations, move their production to a country outside the EU, thus paying less tax because they produce their products in countries that do not have as tight a control mechanism as the EU, even though they produce the same product with the same amount of emissions. Thus, as production shifts outside the EU, EU producers pay more taxes despite the same product and emission rate, while non-EU producers gain an economic advantage with fewer taxes, resulting in an unfair competitive power. While this does not provide a reduction in carbon emissions globally, it causes the geographical distribution of emissions to change and cluster in certain regions. CBAM aims to balance this competitive gap while also encouraging non-EU countries to report carbon emissions and take reducing measures. Borderline Carbon Mechanism: Products coming from outside the EU must be equivalent within the EU. It was created to ensure that products are subject to the same carbon costs. In this way, a more fair and balanced trade environment will be created and it is planned to make all producers responsible for reporting and reducing their emissions.
Working Mechanism of CBAM
The Carbon Border Adjustment Mechanism is a tool created to limit carbon emissions and initially imposes a carbon tax obligation at a certain rate at the border on the imports of iron and steel, cement, aluminium, fertilizer, electricity and hydrogen products imported by the EU, depending on their carbon emission content. With this mechanism, instead of moving carbon-intensive production out of Europe, the aim is to contribute to the reduction of emissions globally while at the same time encouraging international partners and industry to take steps in the same direction.
Existing mechanisms to minimize carbon leakage, including the currently free allowances in the EU ETS, will be gradually changed, and it is envisaged to determine a minimum threshold that will exempt amounts less than 150 Euros from this tax.
If there is already a carbon regime in the country of import and a fee is paid for emissions, this fee is planned to be deducted from the tax within the scope of CBAM.
Considering all these issues, CBAM should work in harmony with the EU ETS, that is, the carbon fees to be applied in CBAM should reflect the fees in the EU ETS.
While direct emissions and indirect emissions for some products (cement and fertilizer) will initially be included in the calculations, an evaluation will be made for other product groups until 2025, and as of 2026, the actual embedded emission amounts in all products within the scope of CBAM will be included with the calculation methods applied in ETS. is planned.
In the Border Carbon Mechanism, countries exporting to Europe will need to report the carbon emission efficiencies of the relevant product groups, collect them from the importing company in Europe and report them to national authorities. At the same time, importing companies that must register to the system and obtain authorization will be required to obtain a carbon certificate, so that they will be obliged to declare the products and emission amounts they imported in the previous year to their national authorities individually or through an authorized organization in the middle of each year.
1 Although there is no obligation for organizations to verify their emissions during the reporting transition period between 2023 and 31 December 2025, companies are expected to increase their integrated reporting capacity during this period. It is planned that the CBAM application will be finalized in 2026 after the transition period. Thus, the CBAM process, which will start as of January 1, 2026, aims to determine financial liabilities based on direct or indirect emissions that have been verified by accredited organizations.
In addition, as of October 1, 2023, arrangements will be made to establish a mechanism to equalize the carbon price paid for production within the EU and the carbon price paid for imported goods, in line with the EU ETS. With this regulation, companies importing into the EU will be obliged to purchase CBAM certificates to pay the price difference. Only countries that have the same climate targets as the EU will be exempt from receiving these certificates, and this regulation aims to encourage other countries to increase their climate targets together and accelerate the green transformation.
Which Products Are Covered?
CBAM initially covers energy-intensive sectors, which include iron, steel, aluminium, cement, chemicals and fertilizers. However, it has been stated that this scope will expand over time and direct and indirect emissions and embedded emission accounts of more products and sectors will be included in this regulation. Therefore, it is important for companies importing to the EU to closely monitor whether their sectors and products are covered by this mechanism.
What Does CBAM Mean for Non-EU Countries?
The Carbon Border Adjustment Mechanism (CBAM) creates a new foreign trade dynamic for non-EU countries. This new regulation introduced by the EU within the framework of combating climate change encourages countries outside the EU to take steps to reduce their emissions. The mechanism will impose tax liability on the importing company for imports from outside the EU and is expected to create a fair competition environment. In this way, it is expected that countries that do not have the same climate targets as the EU will be led to create their carbon regimes and emission trading plans, and will encourage green transformation by reconsidering their climate targets.
Carbon Cost on Imports: Which Countries Will Be Affected?
All non-EU countries importing into the EU may face new cost liabilities imposed by CBAM. However, these obligations may vary depending on the country's own carbon pricing and emission standards and their existence. If a country implements a system with standards equivalent to or more stringent than the EU's emission standards, additional costs on imports may be reduced or eliminated. On the other hand, there will be additional costs for importing companies for countries that cannot meet these standards. Environmental, Social and Governance concepts will come to the fore not only for countries but also for organizations' reporting standards, and there will be a need to transition to integrated reporting of strategy, management, performance and future expectations in the short, medium and long term.
Exempt Countries and Special Cases
In the implementation of CBAM, some countries and regions are exempt. These exemptions will apply to countries that participate in or are affiliated with the EU's emissions trading system (ETS) and countries whose climate targets are the same as those of the EU. For example; Countries such as Iceland, Liechtenstein, Norway and Switzerland are excluded from this mechanism. Additionally, special regions such as Büsingen, Heligoland, Livigno, Ceuta and Melilla are excluded from this scope. However, it should be noted that these exemptions are not permanent and are subject to certain conditions. In particular, it should be noted that in 2030 the EU will review these exemptions and exempted countries must have implemented the decarbonization measures they have committed to and an emissions trading system equivalent to that of the EU.
Distribution of Powers between the Commission and Member State Competent Authorities
The distribution of powers between the Commission and the Member State Competent Authorities is of critical importance to ensure the effective implementation of CBAM. This involves a complex structure and each institution and authority has specific roles and responsibilities.
Central Systems and the Role of the Commission
The European Commission has a central role in the successful implementation of CBAM. The Commission works together with member countries to ensure that the mechanism operates effectively. Centralized systems are vital to prevent carbon leakage, monitor emissions reporting and ensure harmony between member countries.
The Commission sets the basic rules and regulations of CBAM, while also overseeing how these rules and regulations are implemented. In particular, it has a key role in setting carbon emissions reporting standards, setting emissions quotas and coordinating data sharing among member countries.
In addition, the Commission also has the task of resolving disputes that may arise between member states. This is especially true for disputes that may arise between countries with different interpretations of carbon emissions reporting and trading systems.
Responsibilities of Member State Authorities
The competent authorities of each member state have broad responsibility for how CBAM will be implemented within their borders. These authorities audit the carbon emission reporting of companies in their own countries, monitor emission quotas, and impose the necessary criminal sanctions on companies that exceed them.
Moreover, these competent authorities will be in constant communication with the Commission. This is essential for both data sharing and information exchange about general applications of CBAM. Competent authorities provide guidance to companies in their countries, provide them with information on emissions reporting standards and emissions trading systems, and support them in complying with new regulations.
Consequently, the distribution of powers between the Commission and member state competent authorities is of vital importance to ensure the effective functioning of the CBAM. Both parties contribute to the successful implementation of the mechanism by fulfilling their responsibilities.
Turkey's Position Against CBAM
Considering that Turkey is a country with deep economic and commercial relations with the EU, that 40.6% of its total exports are to the European Union, and that it ranks 6th among the countries exporting to the EU, the benefits of CBAM will be It seems to be one of the countries that need to adapt fastest to new costs and regulations. Since the new regulations aim to reflect the carbon cost of imports into product prices, the competitive advantage of imported/to-be products in the EU market may be at risk.
For Turkey to be exempt from taxes within the scope of CBAM, it must have a carbon regime parallel to the EU ETS system and its climate targets must be updated appropriately. In this way, importers who will trade with the products of manufacturers who effectively pay carbon taxes will be exempt from CBAM. Turkey National Contribution Declaration Targets Increased the climate target at COP27 by reducing it to a 41% reduction rate. At the same time, National Emission Trading System studies are included in the medium-term program and will continue to be studied between 2023-2025. At the same time, the Green Deal and National Carbon Pricing Specialization Working Group of the Ministry of Environment, Urbanization and Climate Change continues to carry out studies on the operation of the national ETS, and with the implementation of the IPA III Project and the Transfer of EU ETS Legislation to Our National Legislation Project, the AV of the ETS to be established in our country. It is aimed to ensure compliance with the legislation.
Main Sectors That Will Be Affected in Turkey
Energy-intensive sectors of the Turkish economy, especially the iron-steel, aluminium, cement, chemical, the petrochemical and energy sectors, will bear the brunt of the costs brought by CBAM. These sectors are sectors that cause large amounts of carbon emissions in their production processes and therefore may impose an additional cost burden on importing companies when exporting to the EU. These sectors, and other sectors expected to be added as of 2026, will need to invest in the light of green transformation and make their production processes more environmentally friendly to reduce direct or indirect carbon emissions and embodied emissions, otherwise the emissions allowed in the emission trading system planned to be implemented will be reduced. If they exceed the level, they will face carbon taxes and perhaps even criminal sanctions.
Compliance of Turkish Companies with CBAMsay
If Turkish companies want to continue exporting to the EU, they will need to have integrated measurement and reporting of carbon emissions that CBAM will bring, knowledge about emission trading systems, and international legal continue to operate following regulations should start working on it now.
To measure their emissions, companies must first establish a system that complies with internationally accepted standards and methods, or work with appropriate organizations and have their reporting verified by accredited organizations. This allows companies to both know their carbon footprint and accurately carry out the reporting required by the EU.
Turkish companies should also closely follow the latest news on the EU's emissions trading system, the sub-regulations expected to be enacted in the Climate Law, the transfer of ETS revenues to the green transformation investments of institutions and organizations with the establishment and gradual commissioning of the National Emission Trading System, and the developments regarding the planned National Taxonomy policy. It is important for them to be informed and to give more priority to green transformation by developing and organizing integrated reporting systems within their structures.
What Should Companies Do During the CBAM Compliance Process?
CBAM requires serious transformation for companies operating both in Europe and outside Europe. Companies need to comply with this new regulation, maintain their competitiveness and continue their commercial activities. However, this adaptation process requires a strategic approach.
Carbon Footprint Calculations and Reduction Strategies
The primary step is for companies to calculate their carbon footprint accurately. This is critical to comply with the requirements of CBAM. When making these calculations, companies must adopt methods that comply with EU standards and protocols. Accuracy of calculations is vital to both avoid criminal sanctions and minimize costs.
At this point, companies should create their internal teams from experts in the field, nurture their employees with corporate training, or cooperate with an expert team.
In addition to these calculations, companies need to create mitigation strategies and implement these strategies. This could include a range of measures, from improving energy efficiency to switching to renewable energy sources.
Financial Planning and Risk Management
Scenarios should be developed for the National Emission Trading System to be developed within the scope of compliance with CBAM, carbon collections/credits, criminal sanctions that may be encountered in case of non-compliance with the determined limits and other risk factors, and appropriate budget planning should be prepared by prioritizing.
Sustainability and Green Transformation
CBAM should be seen as an opportunity for companies to review their sustainability and green transformation strategies. This not only reduces carbon emissions but can also increase companies' brand value and create new business opportunities.
Finally, it is recommended that companies establish expert teams in this process, collaborate with other companies knowledgeable on the subject, and adopt best practices in their sectors. The adaptation process can be complex, but can be managed successfully with the right strategies and appropriate resources.
Conclusion
In this blog post, we reviewed the basic information about the European Union's Carbon Limitation and Adaptation Mechanism (CBAM). How CBAM works and which sectors as part of the EU's efforts to achieve its climate targets, Net Zero 2030 target and reduce carbon emissions. We understand that it affects. In addition, we discussed Turkey's position against CBAM and the effects of CBAM on the production sector in Turkey and the adaptation process.
Considering the integrated system of CBAM and the planned National Emission Trading System, it is essential to develop appropriate carbon footprint calculations, financial planning, risk management and sustainability strategies in this process.
To guide the CBAM compliance process, Carbon Gate can facilitate collaborations to companies in the CBAM compliance process with its expert staff who are familiar with the technical and legal requirements.
The future of CBAM will be shaped by the EU's Net Zero and emissions trading targets. Therefore, it is important to start the CBAM compliance process and be prepared and master the expected processes.
Carbon Gate is ready to be with you in this process. You can get more information by contacting us. Take a step to contribute to the sustainability of the future and start taking the necessary steps to reduce your carbon footprint.
