Foreign Adversaries Threaten Critical U.S. Manufacturing Sectors

Streamlining CBAM Compliance: Why U.S. Businesses Should Care

September 18, 2024

Article

Introduction

Regulatory frameworks around the world are evolving to ensure industries reduce their carbon footprints. One such initiative is the European Union’s Carbon Border Adjustment Mechanism (CBAM), designed to mitigate carbon leakage by imposing tariffs on imported goods based on their carbon emissions. While this new policy directly impacts EU importers, it also has significant implications for U.S. businesses and others around the world exporting to Europe.

CBAM marks a critical shift in global trade dynamics, and businesses that don’t prepare for compliance may face financial penalties. Understanding the complexities of CBAM and taking proactive steps toward compliance will have increased benefits that can avoid supply chain disruptions and increase competitive advantages on the global stage.

Our recent webinar, Effortless Compliance: Streamlining CBAM Regulation for Your Organization, offers helpful insights on compliance. This article includes some key takeaways for businesses as they prepare to comply with the law and insights on how advanced technology can simplify the complex compliance process.

Overview of CBAM Today

Designed to support the EU’s goal of achieving carbon neutrality by 2050, the CBAM works by placing a price on certain greenhouse gases (GHG) emitted in the production of selected imports. Its goal is to equalize the carbon price between the EU and a given production country, primarily to prevent “carbon leakage” — instances when companies move their production with stringent carbon policies to another more lenient one, thus avoiding taxation.

Currently in the “transitional” phase until the end of 2025, the law targets six sectors with high carbon footprints: cement, iron, steel, aluminum, hydrogen fertilizer, and electricity. This phase requires quarterly reports to the EU on carbon emissions related to the production of items in the six sectors. Businesses will need to measure their current direct and indirect emissions and any carbon tax exposure. Those without a robust data structure to draw from will need to make good-faith estimates.

More requirements and tariffs are part of the next two phases of CBAM, starting in 2026. Nonetheless, U.S. companies that ship goods to the EU or have operations in the EU need to calculate and report on their related emissions — or face financial penalties and competitive disadvantages.

“Just having the capabilities to answer these questions during onboarding will put suppliers in a really good position when bidding for more work.”

Erika Peters

SVP, ESG LEAD AND GLOBAL HEAD OF CORPORATE MARKETS

3 Key Priorities for Complying with CBAM

Several expert insights from our recent CBAM compliance webinar can help companies streamline the complicated process of meeting the law’s requirements. Here are three key takeaways.

1. Adopt a Broad View that Prioritizes Supply Chain Visibility

The experts agree: CBAM is here to stay, and it’s the leading edge of a wave of carbon-emissions regulations around the world. The UK, Australia, and Turkey are considering implementing similar laws.

“This is not a flavor of the week,” says Steve Hatfield, Co-Head of Sustainability for The Carlyle Group. “This is part of a fundamental shift in how economies operate, and it’s critical to be a successful business in the 21^st century.”

Adapting to this shift brings challenges for compliance and sustainability teams, namely knowing what’s in their supply chains before they can accurately report on it.

“Not having a good picture of what products are made of, what’s in the bill of materials, is a major challenge,” says Erika Peters, “Just that lack of clarity is a big driver of uncertainty on how to deal with this regulation.”

She adds that getting clear data on suppliers — and their suppliers — is an important start to getting “your house in order.” However, the necessary task of achieving this level of supply chain visibility is too labor-intensive to do manually.

“It’s been a bit of a surprise for teams to realize just how complex and resource-intensive this effort is,” she says.

2. Focus on Core Capabilities for a Technology Solution

Investing in technology to help with data collection and multi-tier supply chain visibility can save time and money to achieve and maintain compliance over the long term. Hatfield emphasizes this as a strategic advantage for companies starting to comply with CBAM.

“It allows a human reviewer to spend two hours versus 20 hours understanding what’s in scope for CBAM and then getting that initial baseline of your carbon emissions,” he says. “I think those are two great places you should start.”

When it comes to evaluating a technology solution to help simplify CBAM compliance, here is a checklist of key priorities that can help.

Initial evaluation of products in scope
Initial estimation of product carbon footprint
Automated survey capability for collecting supplier inputs
Export capability of reporting, with an audit trail

3. Turn Compliance Efforts into a Competitive Edge

The effort involved with complying with CBAM can build a beneficial foundation that has competitive upsides. U.S. suppliers to the EU will be asked to report relevant data to their partners, and that effort could give them an edge over other suppliers who struggle to meet reporting requirements.

“Just having the capabilities to answer these questions during onboarding will put suppliers in a really good position when bidding for more work,” says Peters.

Once you have the supply chain visibility and the right data, you can take a more proactive approach and analyze the emissions associated with your products and compare them to global averages. This can yield opportunities for product changes or supplier alternatives — even discovery of more economical sourcing options.

Peters emphasizes that getting CBAM compliance right is worth the investment because it can set you up to get ahead with broader carbon emissions and ESG risk management.

“Once you really understand and have visibility into your supply chain, it will help you with CBAM,” she says. “The benefits will also help with carbon emissions for Scope 3, understanding if there’s modern slavery in your supply chain, identifying concentration risks, and more.”

A Solution to Streamline CBAM Compliance

The 1Exiger platform provides companies with all the core capabilities required to deliver CBAM compliance and support planning in a matter of weeks. This is done in the context of broader potential ESG and supply chain risks.

The screenshot below shows a sample dashboard in 1Exiger that tallies supplier-reported and actual data regarding a product’s carbon footprint and highlights for interim purposes where estimated product carbon footprint data is used.

With end-to-end mapping for relevant Combined Nomenclature “CN” product codes (down to raw materials), the platform gives you the ability to calculate product carbon footprint on a mass basis in accordance with EU methodology and certified to ISO 14067:2018 product carbon footprint reporting across the multi-tier supply chain. 1Exiger also helps you accelerate CBAM compliance with:

Accurate, complete, and up-to-date supplier and product information.
Visibility into all connected parties, dependencies and vulnerabilities in your supplier network, with continuous monitoring for supply chain risks.
Pre-formatted reporting for regulatory submission requirements.

Contact us to learn more about how Exiger can help your organization ensure CBAM compliance and address any future supply chain challenges from the CBAM.