The EU’s CBAM Introduces A Major New Carbon Accounting Use Case

The EU’s CBAM Introduces A Major New Carbon Accounting Use Case

Firms exporting into the EU are due to become a big, new carbon accounting market. The EU, which aims to reduce emissions by at least 55% by 2030 compared with 1990 levels, has implemented a carbon border adjustment scheme to prevent the shifting of economic activities to less climate-regulated regions. The Carbon Border Adjustment Mechanism (CBAM) was formally adopted on May 10, 2023, with transitional reporting rules being announced on August 17. The central issue for firms that currently face CBAM reporting requirements – such as cement, aluminium, fertilizers and hydrogen – is how to build a carbon accounting system to meet regulatory expectations and avoid compliance-related fines.

From October 1, 2023, until December 31, 2025, firms will have to report embedded direct and indirect emissions within carbon-intensive products. From January 1, 2026, these firms must buy certificates – representing a carbon tax – to account for these emissions. By 2030, the CBAM will apply to all sectors covered by the EU’s regulated carbon pricing system, the Emissions Trading System (ETS).

Importers must adopt one of two allowed methods (‘EU Methods’) to calculate emissions. The first is a calculation-based approach, using activity calculations; the second uses data stemming from emissions monitoring devices, such as continuous emissions monitoring (CEM) systems. A further 20% of embedded estimations may be based on estimated values. The biggest challenge for firms, however, is not the calculation of direct emissions data from plants; CEMS are a mature and tested technology to support this. Rather, firms must get to grips with calculating embedded, indirect emissions – and this will require significant investment in supply chain emissions data collection.

Under the CBAM, embedded emissions of input materials are referred to as ‘precursors’. For importers of complex goods – which represents ‘finished’ goods, such as steel beams or ready-to-use fertilizer – they are therefore liable to report the precursor emissions (defined within CBAM), as well as the emissions arising from the energy used in the production processes.

Although CBAM requirements are less broad than for those reporting under the full range of GHG Protocol Scope 3 categories, they nonetheless represent a significant burden for importers. Importers will need to build a data management architecture to collect and manage supplier data, focusing on the interface between procurement and carbon management platforms, as well as investing in lifecycle analysis (LCA) databases to support compliance calculations. At a business strategy level, importers will need to use the reporting grace period to understand potential compliance costs, and how these will impact overall transition strategies.

Ultimately, firms will need to ask – is it more affordable to decarbonize production methods, or face the burden of the carbon tax?