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Croatia: Are you Ready to Meet the Demands of the World’s First Carbon Border Tax?

Croatia: Are you Ready to Meet the Demands of the World’s First Carbon Border Tax?

Issue 10.10
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The European Union has initiated the world’s first carbon border tax, called the Carbon Border Adjustment Mechanism (CBAM). The CBAM Regulation was ratified by EU co-legislators on May 10, 2023, and became legally effective on May 16, 2023 following its publication in the EU Official Journal.

The primary aim of the CBAM is to ensure that imports from third countries into the EU are subject to carbon charges similar to those applicable to EU businesses. A multifaceted initiative, the CBAM seeks to curtail carbon emissions and discourage companies from shifting their production outside the EU by providing incentives for the decarbonization of non-EU manufacturing processes. The CBAM will initially apply to imports of commodities whose production is carbon intensive and at most risk of carbon leakage. It will focus on direct emissions in six specific industries: iron, steel, cement, aluminum, fertilizers, and electricity.

Implementation of the CBAM

The CBAM will have a transitional phase (from October 1, 2023, until December 31, 2025) and a full implementation phase (from January 1, 2026, until December 31, 2034). Prior to the CBAM’s entry into force, the European Commission adopted an implementing regulation that sets out the guidelines for the transitional period of the CBAM.

During this phase, Croatian importers must register as authorized CBAM declarants with Customs Authorities of the Republic of Croatia and they must also prepare a quarterly report with details on the total quantity of each type of goods, actual total embedded emissions, total indirect emissions, and the carbon price due in the country of origin. Failure to report or to correct inaccurate CBAM reports is subject to penalties, with the implementing regulation providing for penalties of between EUR 10 and EUR 50 per ton of unreported embedded GHG emissions.

The implementation phase is scheduled to commence on January 1, 2026. From then on, importers will need to become authorized declarants, i.e., obtain authorization for importing CBAM goods. They will also have to publish yearly reports which must show the quantity of CBAM goods imported into the EU in the preceding year and their embedded GHG emissions. Importers will also have to submit CBAM certificates to cover the emissions declared.

What Will the Introduction of a Carbon Tax Mean for the Croatian Economy?

Many businesses in Croatia engaged in importing goods from third countries won’t face significant repercussions with the introduction of the CBAM system starting on October 1 this year, especially during the initial transition phase. Nevertheless, these businesses will begin to experience more pronounced effects – both fiscal and administrative – as the CBAM is gradually implemented, particularly post-2026, or after the transitional period concludes.

The adoption of the CBAM system may lead to a possible decline in product imports from non-EU countries as a consequence of elevated import expenses, leading to higher overall trade costs. Consequently, there is a potential for reduced profit margins when selling within the European Union, encompassing all member states, including Croatia. The improved price competitiveness of EU and Croatian products offers opportunities for Croatian manufacturers to expand their market presence in the significant consumer market of the EU. This, in turn, has the potential to increase the revenue of these entities. Additionally, a positive outcome of the CBAM system’s implementation is the decrease in imports from third countries, leading to increased exports of Croatian products to the EU market, which was previously less competitive due to reduced procurement and import from third countries. These shifts in export and import dynamics could contribute to a growth in Croatia’s gross domestic product.

A negative consequence of the CBAM system’s application to the domestic market is the significant possibility of price increases for end consumers, especially for those who allocate a higher portion of their personal income to purchasing products from third countries. This could potentially lead to short-term inflationary spikes if the CBAM system’s impact is assessed independently of other potential inflationary factors.

The implementation of the CBAM application process will be the responsibility of the Customs Authorities of the Republic of Croatia. Further acts necessary for the implementation of the mechanism are currently being prepared (delegated and implementing regulations, national regulations).

By Tamara Jelic Kazic, Partner, Karmen Barbic, Associate, and Ronald Filipcic, ESG Manager, CMS

This article was originally published in Issue 10.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.