CBAM Expansion Moves Closer: More Than 200 New Goods and a Crackdown on Circumvention

Although the proposal remains at the legislative stage and its final form may still change, several elements already deserve attention because they may have significant implications for importers, manufacturers and businesses operating further along the supply chain.

Extending CBAM to downstream products remains a priority

The key premise of the proposal is to maintain the planned extension of CBAM to so-called downstream products, i.e. goods manufactured from materials already covered by the mechanism, such as steel, aluminium and fertilisers. Examples of products that may fall within the extension include selected household appliances and motor vehicles. According to the latest proposal, the scope of the rules would cover around 200 products, compared with approximately 180 items under the Commission’s original proposal.

Importantly, the list of products would not be closed. The proposal provides for an annual market review, under which further groups of goods would be assessed for potential inclusion in CBAM. The assessment is expected to take into account, among other factors:

• the level of emissions associated with production;
• exposure to international trade;
• the risk of circumvention;
• consistency with the EU’s climate-policy objectives.

This means that businesses should not limit their analysis to the current list of products. Even if a particular product is not covered in the first phase of the extension, it may fall within its scope in subsequent years.

Potential temporary exclusion of products from CBAM: what is Article 27a?

The proposed Article 27a, sometimes described as a CBAM “emergency brake”, has been controversial from the outset. It would allow certain products to be temporarily excluded from the mechanism if its application were to cause serious disruption to the EU internal market.

The latest proposal does not remove this solution, but significantly narrows the circumstances in which it could be used. An exclusion would be possible only in the event of serious and unforeseen circumstances causing significant damage to the internal market. In addition, there is a proposal to introduce a specific economic indicator: an increase of more than 50% in the prices of imported goods compared with the average of the preceding ten years, persisting for at least six months. These parameters, however, remain subject to negotiation.

At the same time, the proposal assumes that, where a product is temporarily excluded from CBAM, the corresponding portion of EU production would not be subject to further reductions in free allocation under the EU ETS.

Greater emphasis on preventing circumvention of CBAM rules

One of the most interesting elements of the proposal is the introduction of new measures to counter practices involving the supply to the EU of only products with the lowest carbon footprint, known as resource shuffling.

The European Commission has long highlighted the risk that non-EU producers could direct to the EU market goods manufactured in their most modern installations, while more emissions-intensive production would continue to be supplied to other markets around the world. In that case, the emissions declared for imports into the EU would be lower, even though global emissions would not actually decrease.

The new proposal provides that, for certain combinations of products and countries of origin, importers may be required to demonstrate that the producer does not engage in such practices. This may mean the need to obtain more detailed data on the production process and exercise greater control over information provided by manufacturers outside the European Union.

What do the planned changes mean for businesses?

Although negotiations are ongoing, the direction of the changes is becoming increasingly clear. Businesses should start analysing the potential impact of the CBAM extension on their operations now.

In particular, it is worth:

• checking whether goods offered or imported may fall within the new categories;
• analysing the supply-chain structure and sources of emissions data;
• assessing the ability of non-EU suppliers to provide detailed environmental information;
• preparing procedures that make it possible to demonstrate the absence of circumvention practices;
• taking account of the potential financial impact of the need to hold CBAM certificates.

For many businesses, the coming months may prove crucial in preparing for a new dimension of CBAM obligations. It is becoming increasingly clear that the EU mechanism will not be limited to basic raw materials, but will gradually extend to a significant share of processed products and more complex value chains.

CBAM advisory services: how can we help?

We support importers and manufacturers at every stage of preparing for CBAM obligations: from verifying whether a given product is, or may become, covered by the mechanism; through supply-chain analysis and obtaining emissions data from non-EU suppliers; to preparing reporting procedures and assessing the financial impact of CBAM certificates. Our CBAM advisory services also include ongoing monitoring of the legislative process, enabling our clients to understand well in advance which changes will affect them.

Questions? Contact: Łukasz Pamuła – lukasz.pamula@thedy.pl or Wiktoria Wyszyńska – wiktoria.wyszynska@thedy.pl