In brief
On 1 October 2023 the European Union (EU) implemented the Carbon Border Adjustment Mechanism (CBAM) to address ‘carbon leakage’ by broadly equalising carbon costs between domestic products and EU imports within specific emission-intensive sectors.
Recognising the initial administrative burden this posed, particularly for small to medium importers, the European Commission released the first proposed Omnibus Simplification Package (the OSP) on 26 February 2025. The proposed OSP aims to simplify compliance with several EU regulations, including the CBAM, Corporate Sustainability Due Diligence Directive (CSDDD), Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation.
Key proposed changes to the CBAM would include a new 50-tonne annual exemption threshold to provide relief to smaller importers, significantly reducing the number of importers in scope (by as much as 99%) but while also maintaining the mechanism's focus on real carbon emissions (with 90% of the originally in-scope emissions remaining in scope).
Additionally, importers who remain in scope of CBAM will be provided with additional concessions related to default emissions calculations which may now be relied upon to a significant degree, and there has been as 12-month deferral of the CBAM payment mechanism.
In detail
What is the CBAM?
The Carbon Boarder Adjustment Mechanism is a policy initiative by the EU to address carbon leakage and promote sustainable trade practices. CBAM involves imposing a carbon tax on certain imports into the EU market from countries with (broadly) less stringent climate pricing policies. The CBAM is designed to level the playing field between EU producers who are subject to increasingly stricter carbon pricing regulations under the EU Emissions Trading System (EU ETS), and foreign producers of similar products, who may not face the same carbon pricing.
What is the Omnibus Simplification Package (OSP)?
The OSP is a legislative proposal by the European Commission aimed at streamlining and consolidating the EU’s sustainability framework. The OSP proposed three major changes to the CBAM, which include:
- introducing a new annual importation threshold
- simplifying the process for calculating ‘embedded emissions’, and
- delaying the financial mechanism by 12 months.
New annual importation threshold
The OSP introduces updates the current CBAM to introduce a new annual importation threshold. This is currently set at 50 tonnes of net mass for cumulative annual imports of in-scope CBAM products (excluding electricity and hydrogen). The new threshold will be applicable to commodities such as aluminium, cement, fertilisers, iron and steel. The threshold corresponds to approximately 80 tonnes of CO2 equivalent on average. The EU Commission expects this threshold will exempt approximately 99% of all importers into the EU but maintains approximately 90% of embedded emissions in-scope.
Relevantly, where an importer expects to exceed the annual threshold or intends to import goods after exceeding the threshold, the importer should proactively apply for their CBAM authorisation. For importers who have not been granted the authorisation before exceeding the threshold, penalties may apply for the entirety of the imported goods.
Simplified method for calculating Embedded Emissions
Under the OSP, Authorised CBAM declarants will be required to submit an annual CBAM declaration which confirms the calculation methodology used for determining the embedded emissions of a product. Under the proposed reforms, the embedded emissions can be based on ‘standard values’, which will be published by the EU Commision and will have a markup applied, or actual values calculated by operators (which will require eventual verification). The standard values and associated uplift will be reassessed on a routine basis by the EU Commission.
Several other proposed calculation concessions include:
- the quarterly requirement to hold 80% of the required CBAM certificates is proposed to reduce to 50% of the embedded emissions in each quarter
- the Authorised CBAM declarant should now be able to rely on the information submitted in the CBAM declaration in the previous year, for the same goods from the same countries, and
- where a local carbon price is paid in a third country, this may be deducted from the required number of CBAM Certificates. For simplification purposes, the EU will determine a default carbon price for specific countries where an actual carbon price is not readily available.
Considering the difficulties for Authorised CBAM Declarants in obtaining verifiable information, the possibility of using predefined (albeit uplifted) standard values may present an easier path to CBAM compliance.
Delay of financial impact
The OSP proposal has delayed the financial mechanism of CBAM from commencing on 1 January 2026 to now be from 1 February 2027. From this date, Member States will sell CBAM certificates to Authorised CBAM declarants for embedded emissions related to imports made during the 2026 calendar year. In addition, in the early years of the CBAM, the Commission has proposed to also extend the deadline to submit the annual CBAM declaration and surrender CBAM certificates from 31 May to 31 August.
Key impacts for Australian businesses
The proposed changes to the CBAM, particularly the introduction of a 50-tonne annual threshold, will impact Australian businesses involved in exporting in-scope goods into the EU. Two key impacts include the trade threshold and the calculation method, both of which are discussed below.
Trade threshold
For Australian exporters, the 50-tonne threshold means many small to medium exporters would be exempt from an EU CBAM obligation. However, Australian companies that export to the EU will need to closely monitor their export volumes to assess whether and when they would exceed the 50-tonne threshold per importer. Therefore, implementing robust tracking systems to maintain accurate records of export quantities will be essential. Based on the current proposal, once more than 50 tonnes have been imported and the threshold exceeded, the requirement to purchase CBAM certificates will apply from the next quarter (i.e. the next quarterly requirement).
Based on the operation of the new ‘50% rule’ (which was previously an ‘80% rule’, as noted above), there is a risk the quarterly requirement of holding at least 50% of the CBAM certificates required based on calendar year to date imports will mean that CBAM has effectively applied to all in-scope imports for the full calendar year. The application of this rule will be inherently complex and therefore should be closely monitored.
Calculation method
By permitting the wider use of standard values, many Australian exporters will benefit from this concession in that they will no longer need to calculate the actual values of their embedded emissions. However, the OSP proposal does confirm the standard values will include an ‘uplift’. Therefore, there is still an opportunity for Australian exporters who can calculate (and verify) a lower actual embedded emission compared to the uplifted standard value. These exporters may still be able to unlock a competitive advantage (due to lower CBAM Certificates being required upon importation).
Therefore, before electing to rely on the standard values, we recommend Australian business undertake an assessment of what the actual embedded emissions from their production processes may be, and how this could compare to the standard values. Additionally, Australian businesses should also consider how carbon leakage may already be impacting their value chains. This consideration would include an assessment of where other carbon pricing mechanisms are already (or soon to be) applying globally, as well as the potential impact of Australia’s Border Carbon Adjustment.
Monitor the status of the OSP
As noted above the OSP is still in the proposal phase. Historically, it has taken an extended period of time for proposed changes to EU Regulations (such as the OSP) to navigate the various bodies of the EU legislative system. Additionally, as commonly seen in other jurisdictions, the passage through the EU legislative system may also result in substantial changes to the current form of the proposal.
Practically speaking, Australian businesses will need to determine whether the proposed changes to CBAM will result in the postponement of any currently planned work on CBAM compliance, or whether the more prudent approach of continuing based on the currently enacted CBAM Regulation (which provides substantially less concessions) until such time as (and if) the OSP is enacted is more appropriate for their organisation.
The takeaway
The proposed changes to the CBAM offer Australian businesses, particularly small to medium exporters, relief from the CBAM obligations if their exports remain below the 50-tonne threshold. Whilst larger exporters will still need to comply with the CBAM, the proposed embedded emissions calculation concessions should ease the challenges faced by many producers.
Paul Cornick
Melissa Camilleri
Ryan Jones
Jonathan Banks
James O'Reilly
Partner, QLD Tax Leader, Brisbane, PwC Australia
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