What is CBAM?

What is Border Carbon Tax (CBAM)? Definition, Purpose and Importance for Turkey

The CBAM (Border Carbon Adjustment Mechanism) is a legal regulation that requires certain products imported into the European Union (EU) to calculate, report and cost the embedded emissions (direct and indirect) generated in the production process of certain products imported into the EU after 2026.

The CBAM Regulation was introduced to equalize competition for imported products. as of October 1, 2023, a transitional period is in effect and quarterly (quarterly) reporting is mandatory for covered sectors. This regulation has become a top priority for corporate compliance in the context of managing GHG emissions.

Digital tools such as the CBAM Module ensure full compliance with the EU's Implementing Regulation 2023/1773 by digitizing the CBAM Communication Template structure mandated by the EU Commission. These platforms enable output in standard XML format that can be uploaded to the EU portal.

Why CBAM was implemented?

CBAM has been implemented primarily to prevent the risk of carbon leakage that may occur while achieving the EU Green Deal targets.

Carbon leakage refers to the risk of EU producers shifting their production to non-EU countries with lower environmental standards due to strict climate policies and carbon pricing (EU ETS - Emissions Trading System). If this happens, global emissions would only shift geographically, not decrease.

CBAM aims to stabilize competition by ensuring that goods imported into the EU pay a price equivalent to the carbon price applied to similar products within the EU. This also encourages producers in importing countries (such as Turkey) to invest in low-carbon production.

The European Green Deal and the 2050 Net Zero Emissions Target

CBAM is a financial instrument of the European Green Deal and the 2050 Net Zero emissions targets. In terms of corporate financial sustainability, regulatory costs such as CBAM are considered transition risks arising from climate change. These regulations create financial risks that, if unmanaged, can lead to asset value losses, high operating costs or loss of revenue.

In the face of transition risks such as carbon pricing, decarbonizing their production allows companies to avoid extra costs and remain competitive.

Which Sectors and Products Does CBAM Cover?

The CBAM Regulation covers six energy-intensive sectors exporting to the EU:

• Iron and steel
• Cement
• Aluminum
• Fertilizer
• Hydrogen
• Electricity

The first step for organizations is to identify the HS (CN) codes of their products covered by CBAM and start collecting embedded emission data (SEE) for these products.

The EU Commission aims to expand the scope (e.g. downstream products, chemicals and plastics) by 2030. Therefore, it is seen as a strategic expansion for organizations outside these six sectors to build their emissions inventories through tools such as the Corporate Carbon Footprint to prepare for future obligations.

How Does the CBAM Process Work? What Should Organizations Do?

The CBAM process starts with a quarterly reporting obligation during the transition period (as of October 1, 2023).

The first and absolute step for institutions is to ensure legal compliance. Preparing a CBAM report is critical for the continuation of the commercial relationship with the buyer (importer) in the EU.

What institutions need to do:

• Identify HS Codes and Covered Products: Determine which products are subject to CBAM.
• Collect Embedded Emissions Data: Start collecting accurate energy and process data (Scope 1 and Scope 2 emissions) at the facility level to calculate the Specific Embedded Emissions (SEE) of the product.
• Reporting in EU Format: Preparing the data in the XML format required by the EU and uploading it to the CBAM Transition Period Registration System.

Emission Data Collection and Reporting Process

The CBAM Module requires Scope 1 (Direct Emissions) and Scope 2 (Indirect Emissions) data for embedded emission (SEE) calculation.

Direct Emissions (Scope 1): GHG emissions from fuel combustion and chemical processes (e.g. calcination in cement, PFCs in aluminum) are entered into the system.

Indirect Emissions (Scope 2): Emissions from electricity consumed in production are included in the calculation.

By entering activity data (fuel consumption, electricity consumption, amount of raw materials) in Sections 2 and 3, organizations can automatically calculate the Specific Embedded Emissions of the product (tons CO₂e/ton of goods). For a reliable calculation, centralized libraries containing more than 20,000 emission factors, constantly updated according to EU standards, should be used, as the risk of using incorrect or outdated factors is high in Excel.

The reporting process will require a further significant step from January 1, 2026: Verification of emissions data in importers' annual declarations by accredited verifiers will be mandatory. This makes it critical to set up an MRV (Monitoring, Reporting, Verification) infrastructure such as a Corporate Carbon Footprint (ISO 14064-1 compliance) today to ensure reliability and consistency of data across periods.

Cost Management and CBAM Certification

The platforms enable CBAM certificate cost simulation to manage financial risks ahead of financial obligations starting after 2026. Using the current EU ETS carbon price and applying the offset mechanism if a national carbon tax has been paid, realistic cost projections and CBAM certificate requirement planning can be made.