The transition phase of the EU’s Carbon Border Adjustment Mechanism (CBAM), which began on October 1, 2023, is coming to an end. From January 1, 2026, all importing companies will be obliged to purchase CBAM certificates through which they declare the amount of CO2 emissions for imported goods.
The cost calculation of these certificates imposed by the European Union has turned out to be very complex and unclear, also because many of its factors are still to be defined. To support stakeholders in this transition, SteelOrbis has interviewed Nicolas Endress, CEO and founder of Climease, a globally experienced Swiss company that has developed dedicated software to calculate CBAM costs.
Starting with the basics, what is CBAM?
Basically, it is a carbon tariff applying the same price as the EU carbon scheme. It affects steel, aluminum, fertilizers, cement and other industries. It involves approximately 35,000 companies in the EU, and on average we can say that every importer pays roughly half a million euros per year in CBAM costs, even if such data are very skewed because many companies pay just a little and a handful pay hundreds of millions or tens of millions. The EU is forecast to raise between €13-30 billion per year from CBAM.
Why do we need CBAM?
So, first, we are in a situation of climate urgency. We need to cut half of the emissions globally by the next five years, approximately. That’s what science says.
The European Union has had a carbon tax framework for 15 years, called the Emissions Trading System (ETS), but it works only to a certain extent, because right now the system only taxes local producers. If this carbon tax is further increased, they might risk losing their business to cheaper imports that are not subject to any carbon tax so far. That’s where the CBAM comes in, because it applies to imports the same price that local producers would pay, levelling the playing field. It’s something that the local EU industry wants and supports, aside from it being so complicated.
Does CBAM go in parallel with the ETS system? Does it substitute it? How much does it influence the ETS system?
The ETS is a system that has existed since 2006, and it has been working properly since 2015. Essentially about 13,000 companies in the EU have to buy ETS certificates every year. At the beginning of the year, the EU provides some certificates for free, and some others that have to be obtained through auctions. When a company needs more, they need to go to an auction or to the market and buy them from either the EU or another company that has certificates to spare.
So, this is the mechanism, but the problem is that it’s very EU-centered. Consequently, if a product comes in from, say, China, it is not taxed, and that’s unfair to local producers in the EU.
At the same time, some of them have even stopped producing just to avoid buying new certificates and started importing products from China. So, CBAM is now making sure that all imports are paying the same tax as local producers.
There is a whole market behind the certificates. The auction system is the primary market, but then there is a secondary market where companies trade those certificates, with speculators, banks and so on. It’s a very liquid market, and volatile as well.
CBAM is tied to this market, so that every time an importer buys, he needs to go and get certificates. To sum up, it does not substitute, rather it really complements the ETS system.
On the technical side, how does CBAM work and how will it actually influence importers?
Let’s start again with emissions calculations. The last two years have been mainly focused on collecting emissions data and reporting them. Importers were getting these files, they didn’t really care whether they were right or wrong, they just filled them with data, and they did their job on the calculation of emissions on the supplier side. I’m not going to be too technical, but basically you can calculate emissions based on gas bills, electricity bills, etc.
You follow some rules, and you can calculate emissions. That’s the simple method. The complex method is when you really split your whole company into multiple processes and you track all the production routes.
In the end, with the first one you have one emission factor for all your products, and with the second one you have one specific emission factor for every product.
That being said, it’s very important that companies – especially across the steel value chain – obtain emissions declarations from their own suppliers. For instance, let’s say you have an exporter in Turkey that sells tubes. He buys steel from another producer, who maybe buys his raw materials from others. The thing is that downstream manufacturers are responsible for a very low part of emissions, maybe 10 to 30 percent, but upstream emissions are really the big chunk. So, it’s very important to get those real emissions, otherwise you will have to use higher default values provided by the EU, which are penalizing.
So, the more actual data you collect across the value chain, the better, and the lower the emissions you declare. By the way, soon – when emissions will need to be verified – only either real, verified emissions or default values will be accepted. Nothing in-between.
How do you calculate emissions on the financial side?
There is a formula. This means the importer is taxed on the difference between the import supplier’s emissions minus a benchmark specific to every product. The benchmark represents the greenest way you can possibly produce that particular good, so, essentially, you’re taxed on where you’re at, minus where you could be. This is the first logic.
The second logic is that this benchmark becomes smaller every year. That’s because, also on the EU ETS side, benchmarks decrease over a certain period of time.
Because the aim is to reduce emissions, so consequently the benchmark becoming lower means that the greener you produce the lesser emissions you have to declare and the less you pay, right?
If you declare green emissions, you can either pay very low tax or if you’re below the benchmark you can even enter tax free. But the second part is that the benchmark itself, which is a fixed number right now [at the time of the interview], will decrease over time.
According to the formula, this difference between the imported emissions and the benchmark are then multiplied by the ETS price, and eventually you can deduct any price paid upfront.
What can a company do about this? And how can Climease support them?
The main aim is, first, to find greener suppliers. But what a company should do is decrease the risk all of this and then calculate the opportunity. And how do you reduce the emissions risk? You ask for verification statements across the whole supply chain. The more verified the carbon footprint is, the better.
Now, about the average EU ETS price, we’ll have to wait for the EU to release its benchmarks, which were supposed to be released in September [at the time of the interview], but now it turns out that they will be released in Q1 2026. So, essentially traders and producers are now gambling because they have no clue what benchmark to use.
At Climease, we have validated benchmarks by [Switzerland-based testing, inspection and certification company] SGS (Société Générale de Surveillance). We’ve also worked with a few major steel producers and traders to make sure they are at least logically correct. Still, they are not the final ones, because they are still being revised [at the time of the interview].
Last but not least, you can deduct any kind of carbon tax. But honestly, this emission trading system in the EU that we have is very peculiar, because the total amount of certificates in the market decreases every year and by 2039 or 2040 there will be none. So, companies won’t be allowed to emit CO2 anymore.
This means that our carbon tax framework is not only quite a high tax, but also a commitment to net zero. And again, this is all about reducing the risk of this whole formula and seeing what you can do across this whole scope.
And that’s what we do at Climease. We have this software where we calculate the emissions of the suppliers. We have two experts in our team who can speak Turkish and Chinese that can support suppliers. We have SGS-validated benchmarks that are also confirmed by major steel traders.
As for the last factor in the formula, honestly, nobody has a carbon tax right now, so it will be more interesting to see what happens in the next one to three years maybe.
That’s pretty much CBAM, but basically nothing is confirmed.
So maybe next month we will have had this conversation for nothing.
Yes, it’s really complicated, but I think that the whole market is in desperate need of more education. We have the tool, we have the software, and there are multiple versions of it. You can have a basic, a medium, or a top tier one. But I think right now what companies need is to speak to an expert that knows about this. We have been following CBAM since it was only an idea, and since then we’ve helped around 500 companies, from smaller producers to bigger traders.
For more information: https://climease.
