Fertilizer Matters: Carbon Border Adjustment Mechanism - Update, March 2025

Mike: Hello, and welcome to another episode of the "Argus Fertilizer Matters" podcast. My name is Mike Nash, and I'm a Senior Editor here at Argus. And in this episode, we're going to be focusing on the recent proposed changes to the European Union's carbon border adjustment mechanism, otherwise known as CBAM. To help me break this down, I've asked my very good colleague, Lizzy Lancaster to join me. Lizzy is the senior reporter on the ammonia team. Hi, Lizzy, and thanks for joining us.

Lizzy: Hi, Mike. Thanks for having me.

Mike: How are you today?

Lizzy: I'm good, thank you. How are you?

Mike: I'm marvelous. I'm very excited about talking about CBAM, as you know. Let's just set the scene very briefly. So, what is CBAM? The whole aim of CBAM is to cut greenhouse emissions within the European Union. It's been in development since 2019. It was adopted in May 2023, and came into force a few months later. It's essentially an extension of the European Union's emissions trading scheme or the ETS, beyond EU boundaries. So at the moment, producers of fertilizers outside the EU that import fertilizers into the EU are not taxed for the embedded emissions in that product. So what CBAM does is essentially, it creates a level playing field by imposing a levy or a tax on imported goods, and it's linked to the European ETS carbon price. Ultimately, it's designed to prevent carbon leakage, and that is EU producers moving their production facilities abroad to where the environmental legislation is less strict, or by having the domestic production within the EU displaced by imports from countries with less strict environmental policies. That was a bit of a very rough run through what the carbon border adjustment mechanism is. For those that are listening, also, we did a much bigger, deeper dive into this on an earlier podcast a few months back. So take a look on Argus Direct for that.

On the 1st of October 2023, CBAM entered into its transitional phase, with importers obligated to start reporting their emissions, not actually paying anything, but it actually comes into full effect from the start of 2026. It will initially apply to imports of certain goods whose production is carbon intensive, and as we've said, at most risk of carbon leakage. That's cement, iron and steel, aluminium, fertilises, electricity, and hydrogen. But several concerns have come into play over the last few weeks over increasing levels of bureaucracy and red tape, and the costs for importers resulting from CBAM. And on the 26th of February, the European Commission published a series of proposals to amend CBAM regulation aimed at simplifying it. Those amendments were part of a wider range of proposals put forward by the EU, aimed at boosting the bloc's economy, and clean energy and tech, while also protecting the bloc's competitiveness and bringing down energy costs. So, I've talked enough, Lizzy. Can you talk us through some of these proposed changes to CBAM and what do they mean for the fertilizer sector?

Lizzy: I would love to. Yeah, essentially, there was quite a few changes that the Commission has proposed. And as you said, most of these are aimed at kind of simplifying and really cutting some of those red tape, particularly for smaller businesses, smaller medium enterprises. But there were two really big changes I think, which we'll dive into. So the first was a change to the minimum threshold from which the CBAM would apply, and the second was kind of a delay to the financial obligation. But looking at minimum threshold first. So, during the transition phase where reporters were reporting to the Commission, they found that 10% of importers were actually accounting for more than 99% of the overall emissions in imported goods to the EU. That means that on the flip side, around 80% of importers. So, those small and medium enterprises, were actually accounting for around 0.1% of emissions. So obviously that isn't really including any of our key market players for the first market, but for those small medium enterprises, essentially, by cutting the threshold or changing the threshold, around 80% of importers can be excluded. So, what the Commission has proposed is a change of the monetarily based threshold. So, previously, it was proposed that it would be a 150 euro threshold. They're now suggesting that this has changed to 50 tonnes. So if you import less than 50 tonnes per annum of a good into the EU, you won't be subjected to the CBAM essentially. This means that 99% of actually emissions being imported in those goods are still in the CBAM scope, but we're excluding around 80% of importers essentially. But as I said, that's not really going to apply to any of our key market players. Just looking at ammonia, you're easily importing minimum 4,000 tonnes in one go. So, most market players pretty much all still in scope. That's one of the massive changes. And I think the Commission said that the end result of that is, as I said, around 99% of emissions are still in scope, but most of those importers are excluded.

Moving on to the second big change, there's a delay of certificate purchases essentially. So, previously, CBAM obviously comes in full effect from the 1st of January, 2026. And currently, member states were going to start selling those CBAM certificates from the 1st of January, 2026. This has been moved now until February, 2027. So, declarants will be able to buy certificates now from the 1st of February, 2027. And that's four emissions imported from the 1st of January, 2026. So I think it's really important to distinguish it. It's not a delay in the obligation of CBAM. Anything that is being imported from the 1st of January, 2026, you will still be liable to pay for, but it's essentially a delay in when that financial obligation kicks in. And so, those emissions certificates that you have to buy for CBAM, essentially, as I said, from 1st of 2027, those will be surrendered on the 31st of August, 2027. So that's when the new financial obligation essentially kicks in. And I think the idea behind this was just to give importers a little bit more time to kind of work out exactly what they will be paying. But it is really important to distinguish that it's not really a delay to the obligation. And that will still kick in very much from the 1st of January, 2026.

Mike: Okay, thanks, Lizzy. That's very clear. So just to clarify, so really, the minimum threshold in actuality means very little to the fertilizer industry. Is that correct?

Lizzy: Yeah, obviously, thinking of it from an ammonia point of view, on the ammonia side of the market, but I don't think there's a single case I can think of where any of our key market players would be importing less than 50 tonnes. And I think that's pretty much the same for most products, really. I mean, we're talking about generally hundreds of thousands, if not millions of tonnes a year across pretty much every single product. So, essentially, yeah, for the fertilizer market, the minimum threshold is not really a hugely relevant change, but to the overall CBAM legislation, quite a big change.

Mike: No, sure. No, and you're absolutely right. I think in any of the commoditised fertilizers, you're talking in the thousands of tonnes, and even under our methodology, we're looking at for most products, minimum 5,000 tonne lots. So, the delay of the certificate purchase, if I remember correctly, so they're paying retrospectively, they're paying for 2026. But does that encumber them with a higher financial burden in 2027? I guess the question is, at some point, they're going to have to pay catch up or have we not got that far yet?

Lizzy: The Commission has said that the new date is a specific measure just for the first year of CBAM. I don't think it's entirely clear just yet whether that means that there could be some sort of double payment in 2027. But essentially, yeah, it will be a financial catch up for the year 2026. And the price of those certificates will be based on the quarterly average closing price of the EU ETS allowances of the quarter of the importation. Sorry, that was really wordy.

Mike: No, I got it. I followed you. Yeah.

Lizzy: Essentially, what that means is you will be aware of what the price is that you're going to be obligated to pay in 2027. So I think it gives you a little bit of time. You'll be aware of the obligation. But as I said, I don't think it's entirely clear yet whether that means that there could be a double obligation in 2027. But I think when the final review comes out later this year, hopefully that will be clarified.

Mike: And they're paying on a quarterly basis, if I'm not mistaken, is that right?

Lizzy: Yes, we'll move on to that a little bit later, I suppose, when they talk about the 80%, 50% rule. But essentially, yes.

Mike: Lovely. Thanks, Lizzy. Okay, so we talked about the delay of the certificate purchase and the minimum threshold. Now, the simplification element, there was a simplification to this process that the Commission promised. How do the new proposals make that administrative burden better?

Lizzy: So, I mean, there was quite a few different things that they proposed. Obviously, the biggest one, the minimum threshold means that most importers, if you're only importing a very small amount, are excluded. So that's huge in terms of simplification. One of the other big things that they did was they've changed the way the default values for CBAM will be calculated. So, at the moment, if you're importing, you can either submit your own calculation of the emission. So if I'm importing a ton of ammonia, I can go to the plant that's produced it and get their exact emission profile and then report that myself. Or there's these default values which you can use instead. And under the current legislation, when there isn't reliable data for the exporting country, the EU proposed that they would take the average emission intensity of the worst performing plants in the EU for that type of good. But the issue with that was that actually in the EU, some of the European plants are some of the most emission efficient plants in the world. So, like, for products like nitric acid, for example, even the worst European producers are more greenhouse gas efficient than most of their competitors in third countries. So what they're proposing to do now instead is they'll use the average emission intensity of the 10 countries with the highest emission intensity, where there is reliable data available for those default values. And then another thing that the commission has proposed is, so as I mentioned, this 80% rule, as they refer to it, essentially, if I'm a CBAM importer, at the end of every single quarter, I have to make sure that I already own enough CBAM certificates to cover 80% of what I've imported at the end of every quarter. What the EU is now proposing to do is to move that to 50%. So it releases some of that burden a little bit. I only now have to own, at the end of each quarter, certificates to cover 50% of what I have already imported.

And then the other key change now is that, if I've overbought CBAM certificates, previously I could only sell back one third. Now, I can sell back all of the certificates that I bought in that same calendar year if I don't actually end up importing. And then the last thing that I wanted to touch on in terms of the simplification, I suppose, is under the first law of CBAM legislation, it was really complicated. If I produced something in the EU as, say, a feedstock kind of product, that was then shipped outside of the EU, further processed, and then shipped back into the EU. And the way that you would then kind of end up paying for that final emission, is quite complicated and quite confusing. Essentially, say European ammonia is exported to a non-European country, the ETS obligation is already paid by the European producer in the EU. And I'll say that a non-European producer makes that ammonia into a nitrogen fertilizer and ships it back to the EU. The European importer then has to pay the CBAM, and including the embedded emissions of the ammonia feedstock, but that ETS had already been paid. And then the EU importer had to claim back the ETS, which had already been paid. So that was quite a convoluted process. And what they're proposing is just to simplify all of that. And now, for any product that's falling under this scope, a European importer can claim that there's no embedded emissions on the product because the ETS has already been paid in the EU. So just massively simplifying that process. So, the way that the default values are calculated, the 80% rule being simplified to 50%, and that export-reimport mechanism, those are some of the big simplifications.

Mike: Okay. No, I understand that. And just on the default values, those are published, am I correct?

Lizzy: They are, yeah. They're publicly available and they differ for each product. It's a way of calculating the default values where the reliable data isn't available. That's the big change there.

Mike: Yeah. Okay. Lovely. Thank you. Is there anything you think that these changes fail to address though, Lizzy?

Lizzy: Yes. So we talked about the kind of export-reimport mechanism, but we had seen some of the big first players, namely Yara, were particularly concerned about the export mechanism, and the fact that CBAM kind of fails to address exports of European products. So under current legislative plans, the free carbon allowances ETS that industries get are going to be phased out gradually as the CBAM comes in. So what that essentially means is that European products shipping to non-EU countries will become more costly. And some big first players like Yara were warning that some of these plants in the EU are shipping 20 to 60% of their production outside the bloc. So like for Urea, I think 1.6 million tons of Urea was shipped to non-EU trading partners last year. And the warning there is that there's no mechanism to support exporters who are shipping to countries with higher greenhouse gas emission profile productions. So that hasn't been addressed under the current legislation, but there is still a final review pending. So, as part of this package, the Commission said that there will be a full review of CBAM later this year. So that's going to kind of assess its potential extension to other sectors, downstream goods, and covering indirect emissions. But they have promised that they will also look at how they can help exporters of CBAM products at risk of carbon leakage. And then that should be also followed up with a final legislative proposal in early 2026.

Mike: Wow. Okay. Well, I think this story is going to run and run, to be honest. I think there's still some more things to happen here.

Lizzy: Yeah, I think for sure. I mean, who knows what the next review will say, but I think the aim is still very much, you know, 1st of Jan 2026. So who knows? Wait and see.

Mike: Brilliant stuff. Lizzy, thank you ever so much for that. I think it was a very clear and concise talk through of the changes to what is a pretty complicated subject. So thank you again for that. My thanks to Lizzy Lancaster, who is the senior reporter for our ammonia team. Thank you everybody for listening. We'll be back with another "Fertilizer Matters" podcast very soon. In the meantime, for Argus Media, I've been Mike Nash. Thanks again, Lizzy.

Lizzy: Thanks, Mike.

Mike: And we'll see you again soon. Thanks, again. Bye-bye.