Serbia: CBAM Regulation And Its Effect On Balkan Companies In Iron And Steel, Cement, Fertilisers, Aluminium, Hydrogen And Electricity Sectors

What is the CBAM?

The EU Carbon Border Adjustment Mechanism (the "CBAM") was established by the CBAM Regulation (EU) 2023/956 (the "CBAM Regulation"), which came into force in May 2023. It is a carbon tariff system introduced as part of the EU's goal to reduce greenhouse emissions by at least 55 % by 2030.

While the CBAM is not the first and only mechanism aimed at reducing emissions, it has been specifically designed to respond to carbon leakage, which occurs when companies looking to cut costs shift production to countries with less strict climate policies. This results in EU products being replaced with third-country ones that are cheaper but also more carbon-intensive.

Is it already happening?

The CBAM currently applies within its transitional phase, which will last until 2026. The transitional phase is supposed to be a "smooth roll-out", a learning period for all, giving companies an opportunity to slowly adapt to the challenges and changes that will be required later on.

During the transitional phase, importers are only obliged to report on the emissions embedded in the imported products. These reports are submitted quarterly by either the importer or its indirect customs representative and contain the amount of both direct and indirect greenhouse gas emissions resulting from the production of goods imported in the last quarter.

There are, therefore, no financial obligations whatsoever in this first transitional period, except for the fines that the importers could suffer if they do not submit a report or submit an inaccurate report. The penalties are set by each EU Member State and range from EUR 10 to 50 per ton of unreported or incorrectly reported emissions.

The last CBAM report should be submitted by 31 January 2026, marking the beginning of the definitive CBAM regime. Under the definitive regime, goods covered by the CBAM regime can only be imported in the EU by companies that are authorised CBAM declarants, which means registered with a national competent authority in their Member State to buy CBAM certificates.¹ Those companies will submit annual reports on the emissions embedded in the products they imported and will therefore need to present a corresponding number of CBAM certificates to cover for those emissions. Failure to present CBAM certificates by 31 May each year (starting from 2027) is subject to a fine of EUR 100 for each ton of emitted CO2 for which the certificates have not been presented.

Current product scope

The CBAM, at least in the transitional phase, covers seven sectors where a notable risk of carbon leakage has been identified: iron and steel, cement, fertilisers, aluminium, hydrogen and electricity, as well as certain precursors and downstream products. There is, however, a goal to further expand this scope by 2030, which would greatly broaden the effect of the CBAM.

How are non-EU companies affected?

The CBAM is poised to have a significant overall impact on the businesses of non-EU companies, since their relationships with EU importers could take a substantial financial hit in those cases where the carbon tax ends up being very high.

This leaves producers at an impasse with only two options:

• reducing emissions, which means investing into new, environmentally friendly and more expensive technologies; or
• exploring and resorting to new markets outside of the EU to avoid these costs.

Next steps and room for challenge

Even though the CBAM is ostensibly designed to be compatible with the WTO rules², it could be claimed that it represents a potential violation of multiple GATT principles, notably the most favoured nation treatment, national treatment and/or rules on tariff concessions. In fact, many countries have already expressed concerns regarding the CBAM and have addressed them before the WTO or other institutions.³ Therefore, avenues such as lobbying and legal challenges are still open and expected as a response to this mechanism.

In the meantime, companies operating in the affected sectors should evaluate their options and carefully consider their obligations under the CBAM Regulation. This includes setting up calculation or reporting systems, preparing for the end of the transitional period (becoming authorised declarants where applicable) and especially engaging in management training and educational activities. This is where legal teams will come into play, carefully ensuring compliance with various aspects of this mechanism within the company, all with much-needed help from engineers and environmental policy specialists.

Ultimately, adapting and modifying local legislation can ease the position of local producers at least insofar as the carbon price already paid under local rules will be deducted from the amount due under the CBAM. Otherwise, these new constraints could potentially squeeze the producers from developing countries out of the EU trade sphere.

Footnotes

1. A provisional list of NCAs per Member State is available here: https://taxation-customs.ec.europa.eu/document/download/5595ce5b-9fd2-42f6-9908-ed6325338ffa_en?filename=20240220%20Updated%20provisional%20list%20of%20NCAs%20for%20CBAM.pdf.

2. https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#:~:text=The%20CBAM%20is%20designed%20to,lasts%20between%202023%20and%202026..

3. Concerns were expressed even within the EU. For example, Poland officially challenged the CBAM before the CJEU in 2023. See https://steelnews.biz/lawsuit-poland-calls-for-repeal-eu-cbam-ets-system/.

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