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No More Double Taxation: How to Deduct Local Carbon Taxes from the Cost of CBAM
Local Tax, Discount at the Border
One of the biggest concerns of exporters about the Border Carbon Adjustment Mechanism (CBAM) is the multiplication of costs. "I pay taxes in my home country, do I pay them again at the border?" is a common question. Fortunately, the CBAM regulation provides a clear solution: Offsetting. So how are local carbon taxes deducted from the amount calculated at the border?
The Principle of Avoiding Duplicate Taxation
This is clearly stated in the European Union's CBAM regulation. The main objective of the regulation is to prevent double taxation, i.e. paying twice for the same emission (double taxation).
The rule is simple: If a producer has already paid a price for carbon emissions in its home country and can prove it, this amount is deducted from the tax calculated at the border. This local payment can be either a direct carbon tax or a price paid under an Emissions Trading System (ETS) in the country.
How Does the System Work? Let's Examine with an Example
Let us explain this offset mechanism through a concrete example:
Let's say you are a company producing in Turkey and you have paid 20 Euros per ton under the local ETS in Turkey. When you export your product to Europe, the CBAM tax calculated for this product at the border is 80 Euros. In this case
Amount payable at the border:
you do not pay the full 80 Euro. The 20 Euros you paid inside is deducted and the company pays only the difference of 60 Euros.
Equality Status:
If the tax you pay in Turkey is equal to or more than the amount in Europe, you will not have to pay any additional tax at the border.
Critical Condition: Proof Obligation
However, there is a very important condition for this offsetting to take place: Official Proof.
For the system to work, official documents must prove that the payment was made in your home country. Payments that cannot be documented cannot be included in the offset. Therefore, keeping a record of payments to local systems is vital to reduce CBAM costs.