MACF, the Carbon Border Adjustment Mechanism, is the latest European regulation to follow on from the 2019 Green Deal carbon reduction targets. Part of the "Fit for 55" toolbox, it is the European Commission's new measure against carbon leakage by European Union (EU) companies. As a reminder, carbon leakage is a phenomenon in which companies relocate their production to countries with less stringent climate standards. The Commission is targeting products imported by EU companies from non-EU countries. For the time being, the MACF, also known as CBAM in English, only applies to certain types of goods, which belong to the iron and steel, aluminum, cement, fertilizers, electricity and hydrogen sectors.

What is carbon leakage?

Carbon leakage is the displacement of carbon emissions from a geographical area with more demanding climate standards to a less regulated geographical area. We have used the following two official definitions to illustrate the concept:

• According to the Ministry of Ecological Transition, carbon leakage is "the phenomenon according to which the implementation of binding climate measures, aimed at reducing carbon emissions in a single region, implies the increase in carbon emissions in the rest of the world".

• The European Parliament uses a more specific definition: "carbon leakage is the displacement of greenhouse gas-emitting industries outside the EU to avoid stricter standards".

To go into the details of the MACF, let's take the example of a non-European supplier to a European company affected by the new regulations. This supplier produces a good using raw materials transformed via industrial processes powered by energy. This transformation of raw materials into products also generates waste, including carbon emissions that contribute to global warming. As global warming has costly consequences for our economies (natural disasters, rising sea levels, etc.), climate policies aim to penalize these carbon emissions.

To this end, some countries have introduced carbon pricing that defines the cost of emissions to society. The MACF is precisely designed to correct the gap between the carbon price in the EU (EU ETS) and the carbon price (or lack of price!) in force in the supplier's country.

In practical terms, the adjustment mechanism involves two obligations: declaring the carbon emissions of imported products and purchasing certificates. The MACF ensures a competitive balance between European producers, already subject to strict climate regulations, and their non-European competitors.

Also, the regulations cover sectors that are booming (cement demand could increase by almost 23% by 2050 compared with 2018 levels, according to the International Energy Agency) and energy-intensive, hence greenhouse gas emitters (aluminum production is responsible for 2% of annual global emissions, according to industry specialist GEI, 2022).

MACF will be introduced gradually, starting with a transition phase in 2024-2025 when only emissions reporting will be mandatory. From 2026 onwards, the definitive implementation phase will be implemented, requiring the purchase of MACF certificates, in addition to the reporting obligation.

Companies affected by the MACF regulations must submit quarterly declarations during the transition phase, before this becomes annual from 2026 onwards . By way of example, the importer will have to declare which production processes are used (blast furnaces or electric furnaces), provide details of the materials used (% nickel content in iron) and logically indicate the calculation of direct and indirect emissions.

Initially, several methodologies and approaches are accepted for quantifying the carbon emissions contained in imported products. These methodologies differ in terms of complexity, accuracy and types of input data. There are 3 main methodologies: calculation-based methods, measurement-based methods and methods specific to non-EU countries.

In other welcome news forImporters, the deadline for filing the first MACF declaration has been extended by 30 days (from the original date of January 31, 2024). As reporting is compulsory, companies failing to do so will be fined €50 for each tonne of CO2e emitted.

Importer reporting enables the European Commission to estimate the emissions of imported products and to prepare the sale of MACF certificates. Purchases of certificates will be implemented progressively between 2026 and 2034, until they cover 100% of the carbon price differential between the supplier's country and the EU.

The gradual introduction of MACF certificates coincides with the phasing-out of the free allocation of carbon emission allowances to EU producers. Like reporting, the acquisition of certificates is mandatory. Failure to do so will result in a penalty of €100 per missing certificate.

To file your CBAM return, there are several steps you need to follow:

• Identifying CBAM products among imported products
• Collect the data needed to calculate carbon emissions (e.g. production processes applied, materials used, etc.)
• Calculate direct and indirect carbon emissions
• Prepare the CBAM declaration according to the format required by the European authorities
• Submit the declaration on the CBAM register of the European Union

The AMCF Temporary Register is the online portal on which Importers must file their CBAM declarations.

Discover our article dedicated to the MACF declaration.

The products (basic materials, semi-finished and finished products) covered by the CBAM are imports into the EU belonging to the following sectors: 

• Iron and steel (cast iron tube, screws, nuts, etc.)
• Aluminum (aluminum wires, aluminum bars, etc.)
• Fertilizer
• Cement
• Hydrogen
• Electricity

The sectors covered by the CBAM are sectors already covered by the European Carbon Market (ETS) and account for a significant share of global emissions.

In addition, it is during the production phase that most of the carbon emissions of these products are generated. This makes it easier to measure emissions and allows for a high level of accuracy.

To determine if a product is covered by the CBAM regulation, you need to compare the customs code (CN code) of the product you are importing to the list of codes specifically listed by the CBAM regulations. 

To find out if you are importing CBAM products, Keewe provides you with a checker that you can find via the following link.  

The CBAM distinguishes 3️ between the following main calculation methodologies:

➡ Computational-based approaches involve determining emissions from source flows using activity data.

➡ The measurement-based methodology provides the highest level of accuracy by directly measuring emissions from the production process.

➡ Methods specific to non-EU countries.

The different methodologies for calculating the carbon emissions of CBAM products required by the European Union.

There are two ways to put a price on carbon emissions:

• Introduce a tax with a price for one tonne of carbon emitted called a carbon tax.
• Create an emissions allowance market where obtaining an emission allowance gives the right to emit one tonne of CO2. 

The Carbon Adjustment Mechanism (EU CBAM) aligns the carbon pricing imposed on non-European producers (non-EU ETS) with that imposed on European producers (EU ETS). EU CBAM = (EU ETS) – (non-EU ETS)

The implementation of the CBAM and the planned end of free allocation of emission allowances to European producers are expected to drive up the prices of products on the European Union market. Companies based in the EU and those based abroad will face increasing pressure to reduce their carbon emissions.

The countries that export the largest quantities of CBAM products to the EU. E are the most exposed. Here are the top 5:

• China
• Turkey
• United Kingdom
• Norway
• India 

These 5 countries account for almost half of the exports of CBAM products to the old continent.

The main exporters of iron and steel products are China, the United Kingdom and Turkey (40% of the EU's imports between them).

The top 5 aluminum exporting countries is made up of China, the United Arab Emirates, the United Kingdom, Turkey and Mozambique.

As far as fertilizers are concerned, the EU's most important trading partners are located in Africa: Algeria, Egypt and Morocco.

The largest exporters are typically middle- and upper-income countries, but some less developed countries are also highly exposed to CBAM.

The risks are particularly high for countries that have the following characteristics:

• High carbon intensity for CBAM sectors
• A high proportion of their exports consists of CBAM products destined for the E.U.

Keewe and MACF

At Keewe, our experts can help you understand the challenges of these new regulations. We offer you a unique solution to manage your MACF compliance:

• Easy, automated data collection and management, thanks to integrated transactions and supplier data
• Calculating and reporting carbon emissions
• Generate your regulatory reporting document
• Simulate the financial impact of MACF on your import costs

Visit our CBAM page to learn more and contact us.