The EU is implementing ESG regulations in a high pace. One of the latest requirements is Carbon Border Adjustment Mechanism (CBAM) reporting for EU importers, with the first report due on January 31, 2024. For CBAM reports, EU importers will be required to report emissions data they receive from their non-EU suppliers. This dynamic, in which European companies must rely on data received from (non-EU) supply chain actors, is applied in various EU regulations and introduces a new dimension of data reporting risks which requires a set of specific governance and control mechanisms.

This article is written by Hendrik Bastiaans ([email protected]) and Gidion Lont ([email protected]). Hendrik and Gidion are both part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Supply Chain Management. 

The Carbon Border Adjustment Mechanism (CBAM) introduces complex reporting requirements that go beyond traditional financial metrics. It requires companies that source certain iron, steel, aluminum, cement, hydrogen, fertilizers, or electricity products from outside the EU to report on emissions embedded in their imports. The embedded emissions refer to emissions generated during the production of CBAM goods in the upstream supply chain. The international nature and required collaboration between supply chain actors introduces a new dynamic in international trade. For a more comprehensive understanding of CBAM, we encourage you to read our earlier updates on the CBAM or watch our CBAM introduction video.

External reporting risks 

Although they have no control over the quality or reliability of received emissions data, EU importers bear the responsibility for submitting accurate emission reports and are liable in case of incorrect reports. This type of reliance is seen in more ESG requirements, such as reporting scope 3 emissions which will be required for reporting under the Corporate Sustainability Reporting Directive (CSRD) and introduces major challenges for internationally operating companies. 
One challenge is that within international supply chains, suppliers may not not always be as transparen

t as anticipated or required by EU regulations. For instance, there are various resellers between the importer and the producer of CBAM goods, requiring importers to dive deep into their supply chain. Due to resellers protectionist tendencies, they may not always be transparent about the original producer due to revealing a competitive advantage or other strategic considerations. In addition, producers often view the emissions data that CBAM requires as commercially sensitive information and are hesitant to share full details of their emissions data. 

Second, the rapid pace of doing business impacts the ability to anticipate trade movements upfront. It often involves the placement of import orders with suppliers before the determination of CN import codes required to assess CBAM requirements upfront. Potential challenges may arise in ensuring the accuracy of the classification system used by the supplier, adding an element of uncertainty to the process.

Finally, non-EU suppliers are generally not well-versed in the technicalities of CBAM, particularly when it comes to preparing the emission calculation requirements. For suppliers and operators, an investment in measurement tools and building expertise is required. 

Since legal obligations only apply to EU importers, upstream suppliers and producers may have little incentive to cooperate with CBAM data requests. In addition, CBAM could be viewed as EU protectionism or an additional layer of administrative burden, resulting in CBAM fatigue which may result in suppliers being less inclined to collaborate with EU clients, causing major challenges and risks for importers to comply with CBAM requirements. 

CBAM infrastructure

A comprehensive CBAM infrastructure allows importers to manage the described data collection and reliability risks and prevent potential penalties from the authorities for inaccuracy or even absence of actual emissions data. This infrastructure reduces the risk of reporting irregularities, and, in case of accidental reporting errors, supports evidence building in communication with the authorities.

A CBAM infrastructure is the total of governance measures to ensure data collection and reliability. Effective governance commences with a thorough understanding of the compliance function within an organization. It is imperative to ensure widespread awareness of CBAM regulations across all involved procurement departments. The head of the organization’s supply chain management holds the responsibility to ascertain that (local) procurement officers are well-informed and exercise control over the inflow of CBAM goods, filing quarterly CBAM reports accurately in the portal for their respective countries. The CBAM infrastructure can be seen as the total of measures such as risk assessments, terms and conditions, training of personnel and suppliers, audits, verification of incoming data, and additional controls in IT systems. Recording and documenting these CBAM processes is vital in case of an audit by local Emissions Authorities to support that sufficient controls have been implemented to deliver correct emission reports.   

Forward thinking 

CBAM has caught a lot of attention over the past months from most parties that deal with supply chain related matters. CBAM reporting poses major challenges to EU importers, but regulators have offered flexibility through allowing the use of default values and extended modification periods for the first few reports. This offers importers time to prepare for reporting based on actual emissions data which is to be obtained from the supply chain. Through timely communication with supply chain partners and the implementation of a CBAM infrastructure, importers can prepare and reduce non-compliance risks. 

RSM is Thought Leader in the field of Supply Chain and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.