A SIGNIFICANT STEP FROM THE EUROPEAN UNION: CARBON BORDER ADJUSTMENT MECHANISM
The European Council (“EC”) has signed an important regulation on 10 May 2023 for the reduction of carbon emission and sustainability. Carbon Border Adjustment Mechanism (“CBAM”) which is regulated by the Act of the Parliament numbered 2023/956 has become effective as of 1 October 2023.
The Mechanism will be on transition period until 31 December 2025, and by the date of 1 January 2026 carbon taxation will be commenced to apply to the products imported to the EU.
The aim of the regulation is to prevent carbon high industries causing carbon leak by moving outside the scope of the EU, to sustain a fair competition environment to the EU’s local manufacturers and to promote the manufacturers from the non-EU countries for the clean industrial production with low carbon.
Obligations have been regulated for importers located in the EU, to submit reports during the transition period which will last until the year 2026 regarding the imported products.
Reports which will be submitted quarterly will contain detailed information, regarding the amount and the type of the imported product, the number of embedded emissions and the direct-indirect emissions in the product, and the carbon price paid effectively in a third country. Execution of penalty clauses are foreseen in the event of non-compliance to the reporting obligations or deficient/inaccurate reporting.
Importers who desire to import products under CBAM requires to obtain “authorized declarant of CBAM” status as of 31 December 2024.
Carbon taxation will be applied on direct or indirect emissions as of 1 January 2026 when the transition period ends. Accordingly, importers are required to report each year the amount of and the emissions embedded to the products that are imported to the EU. After submitting the report, carbon tax will be paid by obtaining electronic CBAM certificates corresponding to the total greenhouse gas emissions arising from the imported products.
It is envisaged that for the time being the taxation will be applied to the importation of iron, steel, cement, fertilizer, aluminum, electricity, and hydrogen products which have high risk of carbon leakage and emission intensity.
Even though CBAM seems to primarily concern importers located within the EU, exporter companies that are located outside the EU also must do a comprehensive study to comply with the new regulation. Yet, it is possible that by the implementation of CBAM, additional expenses may arise from the exportation of carbon high products to the EU. For this reason, Turkey is one of the countries that this regulation particularly interests, since its 40,6% of total exportation is to the EU.
Another subject that interests the exporter companies is that the importer company is obliged to report the quantity of emission in the imported product which falls within the scope of CBAM. Such data regarding the product will be provided to the importer by the exporter company.
Therefore, companies located in Turkey require to file a report which estimates the carbon footprint and direct-indirect emissions of exported products under CBAM.
At this point, companies located in Turkey need to evaluate whether the exported product falls within the scope of CBAM by specifically focusing on the product and not the sector. Even if a production isn’t present at the CBAM sectors, the obligation to report would still rise for the EU located importer if the product itself falls within the scope of CBAM. Therefore, it is significant to determine whether the product subject to the exportation is in the frame of Customs Tariff Statistics Position (CTSP) as the products within CBAM are described with a CTSP number.
After the regulation, companies located in the EU are expected to choose the manufacturer for the exportation based on their footprint to reduce its expenses. Therefore, it would be beneficial for the manufacturers of exporter countries to make serious amendments in their policy. As the importers will be exempted from CBAM when they trade with the goods of manufacturers who pay their carbon taxes efficiently, the exporter company will prevent loss of market by providing competitive advantage towards its competitors.