European Union’s carbon tax came into force

The European Union’s (“EU”) Carbon Border Adjustment Mechanism (“CBAM”) came into effect on October 1, 2023, marking a significant milestone in the EU’s approach to addressing climate change and reducing global Greenhouse Gas Emissions (“GHG”).

Created by Regulation EU No. 2023/956 of the European Parliament and the Council (“Regulation”), the CBAM’s primary objective is to burden carbon emissions embedded in products imported by the EU, thus preventing the phenomenon known as carbon leakage, whereby companies relocate their emissions outside the EU to avoid emission regulations.

Emissions from imported products shall be assessed by the importer and reported to the EU member state where the importer is established, with the emissions described in the report to be verified by an accredited verifier in accordance with EU regulation standards – the same as the European carbon market (“ETS”).

CBAM rules shall apply to the direct and indirect emissions – scopes 1 and 2 – incorporated in various products specified in the Regulation, all of which belong to the following sectors: cement; iron and steel; aluminum; fertilizers; electricity; and hydrogen (“incorporated emissions”). Goods with a total intrinsic value not exceeding €150 per shipment are exempt.

Each EU member state must designate a competent authority to fulfill the functions and obligations outlined in the Regulation, including receiving and analyzing emission reports, while the EU Commission’s role is to assist and coordinate the activities of these authorities.

Furthermore, importers established in an EU member state must request authorized CBAM declarant status. Importing regulated goods without this authorization shall result in financial penalties. Once authorized, importers must submit their first emissions report in January 2024.
The CBAM will be implemented in two phases, with the transitional phase in effect from October 1, 2023 to December 31, 2025, and the definitive period starting on January 1, 2026, as defined below:

Transitional Phase (October 1, 2023 to December 31, 2025):

• In this phase, importers must submit a quarterly report accounting for the emissions embedded in imported goods during the preceding quarter of the calendar year, indicating direct and indirect emissions.
• The report shall be submitted to the national authority of the EU member state where the product shall be imported.
• The first report must be submitted by January 31, 2024.
• Three methodology options shall be available in the first year, and from January 1, 2025, only the EU method shall be accepted.
• During this phase, importers shall not be required to make payments or financial adjustments related to CBAM.

Note: CBAM operation shall be reviewed during the transitional phase, with the possibility of expanding the scope of products before its definitive enforcement in 2026.

Definitive Period (starting January 1, 2026):

• Importers must declare annually, on May 31 of each year, the quantity of goods imported in the previous year and their embedded GHG emissions.
• Importers must purchase CBAM certificates in proportion to their emissions.
• The certificate price shall be calculated based on the average weekly value of European carbon market (ETS) allowances, in €/ton of CO2 emitted.
• Importers can deduct amounts already paid for GHG emissions in the country of origin during the production and transportation of the imported goods.
• Non-compliance with the obligations to purchase CBAM certificates and the request authorization for imports as outlined in the Regulation shall result in financial penalties.

Implications for Brazilian Companies:

• Brazilian companies exporting regulated products to the EU need to quickly adapt to the new rules and accepted methodologies for accounting for their production emissions.
• Those who cannot trace or declare their emissions or have higher emissions than their competitors may risk losing business partners in the EU to competitors with a lower carbon footprint.
• If Brazilian legislation promotes emission reduction targets and regulates a carbon credit market, nationally paid amounts can be deducted from the CBAM. The establishment of the Regulated Carbon Market in Brazil will have a positive impact on reducing costs related to CBAM.
• If Brazilian products have higher GHG emissions than those of other exporters, European importers shall need to purchase more CBAM certificates, which may affect the competitiveness of Brazilian products.

As more nations seek to implement similar regulations and take measures to reduce their emissions, businesses worldwide shall face an increasingly complex and challenging business environment. It is clear that environmental sustainability has become a global priority, and those who can adapt and innovate to reduce their carbon emissions shall have a lasting competitive advantage.

Our team is available for further information on this topic.

Principais Contatos:

Alexandre Calmon
Sócio | Partner
E: acalmon@cmalaw.com

Fabiano Gallo
Sócio | Partner
E: fabiano.gallo@cmalaw.com

Marcelo Frazão
Sócio | Partner
E: mfrazao@cmalaw.com 

Rogerio Campos
Sócio | Partner
E: rogerio.campos@cmalaw.com

Vilmar Gonçalves
Sócio | Partner
E: vilmar.goncalves@cmalaw.com

Isabela Morbach
Counsel
E: isabela.morbach@cmalaw.com