EU ETS Maritime

Effective CBAM Cost Management (Part 2): Cost-Mark Ups, Procurement Strategies and Hedging

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In our first article in this series, we derived the demand for CBAM certificates to be submitted annually and the associated explicit CBAM costs based on a specific case study. To effectively manage the strategic and financial impact of CBAM, this article presents CBAM cost mark-ups at product level as well as strategies for procuring CBAM certificates and hedging options.

CBAM cost mark-ups and contractual adjustments

Our fictitious importer of 100,000 tonnes of steel ingots has an initial indication of the liquidity required for imports in 2026 by estimating the need for CBAM certificates and the associated costs. To manage these additional costs of around EUR 10 million at the company level and integrate them into supplier or customer contracts, it is necessary to determine the additional CBAM costs per supplier or per product group and import process. This allows for the consideration of the CBAM costs per product or the influence on gross margins per product during pricing.

The additional CBAM costs should be included in the risk analysis. It is particularly relevant whether real emission values are available or whether an authorised CBAM applicant must use default values in the CBAM declarations. The latter are subject to a penalising mark-up, which means higher CBAM costs.

Our analyses show that the cost differences between the two options are often immense. For example, some of our customers do not incur any CBAM costs in the first years of the CBAM definitive phase when using real emission values. If the importer were to import the same CBAM goods and (must) use default values for reporting, price increases of over 40% could occur as early as of imports in 2026 (see examples in Figure 1).

Additional CBAM costs per product level depending on verified vs default emission values (source: carboneer CBAMCC model)

Figure 1: Additional CBAM costs at commodity level depending on real or default values for emissions (source: CBAMCC model by carboneer)

In many cases, CBAM requires a change to supply or sales contracts. A risk and cost analysis as described above should be taken into account, for example by:

  • Requiring guaranteed and verified emission values from suppliers,
  • Setting price discounts in the event of missing data,
  • Adjusting the purchase or sales prices of goods depending on the CBAM emissions.

In addition, CBAM certificates for imports in 2026 will not be issued until February 2027. This means that costs that will only be incurred in 2027 will already have to be taken into account for contracts and budget planning in 2026. Without the explicit inclusion of additional CBAM costs today, affected companies would have to bear the costs incurred in 2027 due to the purchase of CBAM certificates alone.

Cost management through CBAM certificate procurement strategies

The limited validity and the 50% holding obligation during the year (final decision still pending) of CBAM certificates requires ongoing CBAM certificate management. Obligated companies should therefore develop a procurement strategy for CBAM certificates that covers the following, tailored to the respective risk and company profile:

  • Liquidity constraints and risk profile
  • Potential for cost pass-through in the supply chain
  • Planning and purchasing processes and timeframes
  • Price volatility in the EU ETS

An optimal procurement strategy for CBAM certificates should take the above-mentioned boundary conditions into account individually and must also be statistically superior. To illustrate the differences between procurement strategies, Figure 2 compares the procurement of CBAM allowances at the end of each quarter with a strategy that uses technical analyses of prices in the EU Emissions Trading System (EU ETS). The fictitious CBAM certificate prices are based on the auction prices in the EU ETS in 2022-2024.

Comparison of CBAM certificate procurement strategies showing cost differences between regulation-driven and SMART import-based approaches (source: carboneer CBAMCC model)

Figure 2: Comparison of two procurement strategies for CBAM certificates (regulation-driven strategy in green, SMART import-based strategy in blue) based on fictitious CBAM certificate prices in the years 2022-2024 (source: carboneer CBAMCC model)

Depending on the timing and quantity of CBAM certificate purchases, large price differences can occur, as prices in the EU ETS are subject to fluctuations and therefore have a direct influence on the prices for CBAM certificates. However, cost advantages can be achieved with the help of intelligent procurement strategies. The SMART import-based strategy of Figure 2 was particularly successful when analysed over several years and enabled the importer in the case study to make savings in the millions. Over an observation period of 10 years, the strategy developed by carboneer allows for almost 20% cost savings compared to a purely regulation-driven procurement of CBAM certificates. Active procurement can therefore reduce the explicit costs of CBAM certificates, thereby reducing financial risk, conserving liquidity and providing a competitive advantage.

Hedging of CBAM costs via the EU ETS

As purchased and unused CBAM certificates will be cancelled on 1 October of the second year after purchase (final decision still pending), they cannot be used for the submission obligation in the long term. However, for orders whose actual import date is further in the future or for longer-term cost certainty, an importer can take a further step to minimise risk.

As CBAM certificate prices are based on the prices of emission allowances (EUAs) in the EU ETS, the EU ETS provides a market that enables a hedging transaction. An importer can therefore hedge in advance the maximum CBAM certificate costs during an order or for future planned imports, at least in good approximation. The same principle also applies to the producer or supplier of a CBAM product, as they can guarantee the buyer in the EU maximum CBAM costs through a hedging transaction. This price fixing enables negotiations with suppliers, the calculation, adjustment or passing on of CBAM costs to downstream customers and better budgeting of CBAM certificate costs. Hedging can be used by purchasing physical EUAs or derivative market products on EUAs.

Medium to long-term hedging of CBAM certificate costs based on physical EUAs or futures market contracts purchased in 2025 (currently at EUR 70/tCO2) enables price fixing at the lower end of the expected CBAM costs for the future and, in our case study, savings of several million euros per year. Price hedging as outlined requires integration into the corporate strategy due to its complexity.

Forecast of CBAM certificate costs with and without hedging strategies via EU ETS (source: carboneer CBAMCC model)

Figure 3: Cost forecast for CBAM certificates of the importer in the case study without hedging (green) and with hedging (blue). (Source: carboneer CBAMCC model)

To manage CBAM costs effectively, minimise risks and enable planning security, it is essential to analyse exposure at an early stage. The cost of CBAM certificates is likely to be higher than many market participants and prospective CBAM declarants currently realise. Although there are some uncertainties with regard to CBAM costs, tools such as CBAMCC can already be used today to develop customised scenarios and, based on these, strategies for procuring and hedging CBAM certificate costs.

Effective CBAM Cost Management (Part 1): CBAM Certificate Demand and Explicit Costs

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In the first part of a series on effective CBAM cost management, we use a specific case study to derive the CBAM certificate requirements and the resulting explicit costs. Importers of CBAM goods may already incur high costs for imports in 2026 and should prepare for this at an early stage.

Assessing the financial impact of CBAM

While only reporting obligations apply for importers or indirect customs representatives in 2025, CBAM will enter the regular phase from 2026 (review our article on CBAM here). Above all, this means that, in addition to continuing to report imported goods and corresponding emissions, authorised CBAM declarants will have to acquire CBAM certificates for the embedded emissions contained in the imports from 1 January 2026 and submit them annually by 31 August of the following year. From the perspective of an importer or indirect customs representative, this has strategic relevance and the impact on risk and liquidity management of this additional financial burden should therefore already be analysed in 2025 in order to:

  • Plan a budget for the procurement of CBAM certificates
  • Develop a purchasing strategy for the acquisition of CBAM certificates
  • Manage or hedge price uncertainties of CBAM certificates and thus costs for imported goods
  • Adapt supplier and customer contracts to avoid being stuck with CBAM costs
  • Integrate the effects of CBAM into strategic purchasing decisions

The steps for developing a targeted strategy for CBAM cost management are described below using a case study. The starting point is to determine the relevant CBAM emissions, as this determines the quantity of CBAM certificates to be purchased. The following formula shows the most important parameters. To simplify matters, the assumption here is that no CO2 prices were paid in the upstream supply chain.

Calculation of the demand for CBAM allowances and relevant data sources (without taking into account CO2 prices in the upstream supply chain)

Figure 1: Calculation of the demand for CBAM allowances and relevant data sources (without taking into account CO2 prices in the upstream supply chain)

In addition to the information on the imported products and the embedded emissions they contain, the CBAM benchmarks are particularly relevant for calculating the quantity of CBAM certificates to be purchased. The CBAM benchmarks are expected to be published in Q4 2025. and will be based on the benchmarks for determining the free allocations in the EU Emissions Trading System (EU ETS). The CBAM benchmarks will therefore only be officially announced relatively shortly before the date on which CBAM allowances are purchased. However, a scenario analysis can already be used today to estimate the CBAM certificate requirement with the aid of the corresponding EU ETS benchmarks.

Analyse of the CBAM certificate demand

To illustrate the approach, the following case study uses an annual import volume of 100,000 tonnes of steel ingots in equal parts each quarter. Other important assumptions for modelling the CBAM certificate demand are:

  • No deductible CO2 prices in the upstream supply chain
  • Direct specific emissions: 2.58 tCO2/tproduct
  • Indirect specific emissions: 0.43 tCO2/tproduct
  • Use of a combination of EU ETS benchmarks as a proxy for the CBAM benchmark
  • Inclusion of indirect emissions from 2030 (envisioned in the CBAM Regulation, not yet part of the legal text)

The quantity of CBAM certificates to be purchased annually for the CBAM declarant in the case study is shown below. The importer must purchase over 130,000 CBAM certificates for its imports in 2026, which corresponds to pricing of 50 % of the imported direct specific emissions. This means that a significant proportion of embedded emissions could be priced right from the start of the CBAM definitive phase. This depends in particular on the level of embedded emissions in the imported CBAM goods and therefore on the CO2 intensity of the production process of the corresponding manufacturer. An analysis per import unit, CBAM product and supplier can provide information on important metrics such as the absolute and relative contribution to the need for CBAM certificates.

Estimation of CBAM certificate demand for 2026-2034 with import of 100,000 tonnes of steel ingots per year
Figure 2: Estimation of CBAM certificate demand for 2026-2034 with import of 100,000 tonnes of steel ingots per year (source: carboneer CBAMCC model)

Important: The quantity of CBAM certificates that must be held by CBAM applicants for imported goods is 50% of the imported emissions since the beginning of the year at the end of each quarter (final decision still pending), with an exemption to this rule for imports in 2026, as CBAM certificates can only be purchased from 2027 onwards. However, the actual quantity of CBAM certificates to be submitted is ultimately based on the verified embedded emissions of the imported goods or the standard values of the EU Commission that are yet to be published. This difference between verified emissions values and default values can be significant in some cases. A precise analysis of the relevant imports and associated embedded emissions is essential for estimating the need for CBAM allowances from 2026 onwards.

Cost estimate and liquidity demand for CBAM certificates

The annual costs for CBAM certificates assuming constant import volumes in our case study can now be estimated. Forecasts and scenarios for emission allowance (EUA) prices in the EU ETS can be used for this purpose, as CBAM allowance prices for imports from 2027 are formed on a rolling basis by the weekly average of EUA auction prices (currently at around 70 EUR/tCO2). The carboneer CBAMCC model uses price projections from various publications for this purpose. The projected costs for the CBAM certificates for constant annual imports are shown below; the uncertainty factor due to uncertain price developments in the EU ETS is illustrated by the bars.

Forecast of CBAM certificate costs for 2026-2034 for imports of 100,000 tonnes of steel ingots per year

Figure 3: Forecast of CBAM certificate costs for 2026-2034 for imports of 100,000 tonnes of steel ingots per year (source: carboneer CBAMCC model)

The liquidity requirement for CBAM certificates for the importer or CBAM applicant in the case study increases from around EUR 10 million for imports in 2026 to EUR 25-45 million in 2030. CBAM certificates are neither tradable between companies nor valid in the long term. CBAM certificates purchased under the 50% holding requirement in the previous year can be sold back to the regulatory authority, while excess CBAM certificates will be cancelled on 1 October of the second year after purchase without compensation (final decision still pending). Obligated companies should therefore prepare to understand the financial impact of CBAM.

In our next article, we will go into detail about the options available to importers to manage risk and hedge their CBAM certificate costs.

Implications of the Carbon Border Adjustment Mechanism for the Iron & Steel sector

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On October 1st 2023, the Carbon Border Adjustment Mechanism (CBAM) became effective. As a measure to limit carbon leakage, the instrument complements the European Emission Trading System (EU ETS) by establishing a carbon price on imported goods that is equivalent to the carbon price on domestically produced goods. CBAM introduces a set of reporting and compliance obligations for importers of goods into the European Union.

Why is CBAM needed?

In a nutshell, CBAM is a policy instrument aiming to reduce the risk of carbon leakage under the EU ETS, the largest carbon pricing scheme worldwide that covers approximately 40% of the EU’s emissions. Carbon leakage refers to the phenomenon where climate policy restricts the competitiveness of domestic manufacturers compared to foreign producers that underly less stringent policies and can produce in a less expensive but environmentally more harmful way. The risk then arises that industry moves from the regulated jurisdiction to countries with lower environmental standards. Climate policy that does not manage carbon leakage could lead to the relocation of emission-intensive manufacturers abroad. Emissions would be exported instead of mitigated, and the domestic economy remains weakened.

Under the EU ETS, regulated entities, that are subject to the risk of carbon leakage, receive emission allowances free of charge conditional on their emission intensity in relation to a sectoral benchmark. This way, the competitive disadvantage of European climate policy is mitigated. The distribution of free allowances is phased out until 2034 and CBAM serves as a substitute to reduce the risk of carbon leakage for EU’s industry from there on.

What is the mechanism & scope of CBAM?

CBAM starts with a transitional period from October 2023 until end of 2025 with only reporting obligations for importers of certain goods. Importers or indirect customs representatives that transfer any CBAM goods into the EU, are obliged to calculate and report the embedded emissions that occur during the production process of CBAM goods and their precursors according to detailed rules.

The definitive period of CBAM starts in 2026. From then onwards, importers must purchase a proportional amount of CBAM certificates. The price of CBAM certificates is closely linked to the price of emission allowances in the EU ETS, momentarily around 85 Euro per ton of CO2e and expected to range between 100 and 150 Euro by 2030. Any carbon price due for the embedded emissions in countries of origin reduces the number of CBAM certificates to be surrendered (cf. figure 1). This mechanism assimilates the carbon price due for foreign and domestic goods that are sold on the EU market. Compared to the system of free allocations, CBAM not only increases the EU ETS revenues (free allocations of emission allowances are phased out), but also incentivizes ambitious carbon prices and industrial decarbonization abroad.

Figure 1 CBAM – basic principle. Source: carboneer.

CBAM currently covers six EU ETS sectors accounting for roughly 50% of emissions in the EU ETS: aluminium, cement, electricity, fertilisers, hydrogen, and iron & steel. For now, in the iron & steel sector, 478 CN goods are combined into 8 aggregated goods categories that share similar production routes, system boundaries and precursors. The CBAM covers mostly emissions of CO2 but includes perfluorocarbons for aluminium products and nitrous oxide for some fertilisers. For the iron & steel sector, only CO2 emissions are relevant.

The European Commission will designate additional products further along the value chain of CBAM goods for potential inclusion in the regulation no later than by the end of 2024. Starting in January 2028 and subsequently every two years, the Commission will evaluate the overall effectiveness of CBAM and deliberate on the potential inclusion of additional sectors within CBAM.

What are the CBAM obligations for importers?

To fulfil their CBAM obligations, importers or indirect customs representatives must register as authorised CBAM declarants prior to the import of CBAM goods into the EU. For each calendar year, regulated companies must calculate the emissions embedded in imports following the methodology set out below and report the results through the CBAM declaration by May 31st in the following year. Within these declarations, the importers may also claim a reduction of CBAM certificates to be surrendered when a carbon price has been effectively paid in the country of origin. The information contained in the CBAM declarations must be validated by third party verifiers that are accredited under the EU ETS regulation. Importers must get access to the CBAM registry, the platform where data on embedded emissions is communicated to authorities and where CBAM certificates are bought, surrendered, and excess certificates are sold back to the authorities.

The obligation to surrender CBAM certificates is phased in until 2034. For the transitional period, no CBAM certificates need to be purchased. Starting with the definitive period in 2026, importers need to surrender CBAM certificates. The number of CBAM certificates to be surrendered, increases proportionally to the phase-out of free allocations in the EU ETS: in 2026 regulated companies have to surrender CBAM certificates for 2.5% of their embedded emissions. This share gradually increases until it reaches 100% in 2034.

How to calculate embedded emissions

The EU defined detailed rules for the calculation of embedded emissions. Generally, CBAM declarants must consider direct emissions from the production process as well as indirect emissions from the generation of energy used in the production process. The CBAM Directive lists some goods (also from the iron & steel sector) for which only direct emissions are to be considered as the production facilities benefit from EU compensation for higher electricity prices due to carbon pricing. For the actual calculation of direct emissions, obliged entities can follow either of the methodologies:

  1. The calculation-based approach where raw materials and inputs used in production are combined with calculation factors such as net calorific values or emission factors.
  2. The measurement-based approach where emissions are determined through continuous measurement of flue gas flow and greenhouse gas concentrations in flue gases.

When CBAM declarants lack the required data to perform the calculations they can revert to default values to be used as emissions factors. Default values are to be published by the end of 2023, the EU has however published a first study indicating the differences in emission intensities among the EU and its trading partners for CBAM goods (cf. figure 2).

Figure 2 GHG emission intensity for CN code 7217 10 – Wires of non-alloy steel. Value for Belarus is based on the secondary production route. Source: Vidovic et al. (2023).

CBAM declarants can also ask their suppliers to register themselves as an operator located in a third country within the CBAM registry. They may apply above calculation methodology to their output and obtain verification according to EU ETS standards. Suppliers can then disclose the information on embedded emissions to CBAM declarants who in turn may use this information within their CBAM declarations.

Which rules apply in the transitional period?

Acknowledging the challenges posed by the CBAM for declarants, the EU gradually implements the mechanism with a transitional period which started October 1st 2023 and ends December 31st 2025. The transitional period aims to function as a trial and educational phase for all involved parties, including importers, producers, and authorities. Its purpose is to gather valuable data on embedded emissions in order to improve the methodology for the definitive period starting January 1st 2026. CBAM obligations are reduced to reporting during the transitional period (cf. figure 3).

To increase the learnings during the transitional phase, instead of annual CBAM declarations, declarants must submit CBAM reports on a quarterly basis. The first report, covering the embedded emissions from the fourth quarter 2023 is to be submitted by January 31st 2024. The calculation and general reporting requirements are however somewhat eased for the transitional phase: In addition to the calculation methodology described above (EU Method), for the transitional period, two additional methodologies are available:

  1. Until December 31st 2024, embedded emissions can be determined through third country national systems such as carbon pricing schemes or monitoring systems whose accuracy and coverage is similar to the EU ETS.
  2. Until July 31st 2024, embedded emissions can be determined using only default values from the EU or elsewhere if calculation methodologies align.

For the transitional phase, all entities must report on both direct and indirect emissions. The exemptions for indirect emissions in the iron & steel sector mentioned above are only valid for the definitive period. Penalties can be imposed in cases where the reporting declarant fails to submit a correct or complete CBAM report or doesn’t rectify errors when initiated, with penalties ranging from EUR 10 to EUR 50 per tonne of unreported emissions.

Figure 3 CBAM time schedule. Source: carboneer.

What are the immediate tasks for companies?

The definitive period is two years away, however, here are the preparations companies should conclude at once to comply with the legal obligations of the transitional period and to get a head start for the definitive period:

  • Identify which of your imports are subject to CBAM regulations. Engage with suppliers and manufacturers to gather emissions data for imported goods. Collect information on carbon pricing schemes in countries of origin for your CBAM goods.
  • Get registered as CBAM declarant or have your indirect customs representative getting registered.
  • Get access to the transitional CBAM registry. This is the interface for regulators and regulated entities for the transitional period.
  • Learn how to handle the CBAM reporting template published by the EU.
  • Establish processes to collect emissions data and set aside personnel capacities to handle CBAM duties.
  • Make use of EU ETS allowance price forecast and embedded carbon projections to assess the medium-term economic implications of CBAM regulations on your supply chain and business.
  • Understand the implications of CBAM on your supply chain and assess your price and regulatory risk in different countries.

With the introduction of CBAM, emission monitoring and reporting along with carbon pricing plays an ever more important role for non-EU producers and importers. While the emission reporting obligations during the transitional period of CBAM are new to many companies and require comprehensive preparation, regulations on CBAM will evolve during the coming years and should be closely monitored by third country and EU producers as well as traders and importers alike. Details on CBAM implementation rules will for example still be required on the treatment of green electricity procurement through power purchase agreements in third-countries or on updated product lists subject to CBAM obligations. Ultimately, companies require a strategic approach towards these new realities of global trade and decarbonization.  

Sources:
Vidovic, D., Marmier, A., Zore, L. and Moya, J., Greenhouse gas emission intensities of the steel, fertilisers, aluminium and cement industries in the EU and its main trading partners, Publications Office of the European Union, Luxembourg, 2023, doi:10.2760/359533, JRC134682.

Biggest update to EU emission trading rules in years, part I: EU ETS and CBAM

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Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain. In this article we unpack some of the most relevant points on changes and updates on the EU ETS I and CBAM.

EU ETS I: new inclusion, rebasing and strong annual cap reduction

Currently, the existing EU ETS covers roughly 40% of the EU’s emissions. They stem from the energy sector, industrial installations and aviation. Maritime transport will be the newcomer and large vessels of 5000 gross tonnage and above must gradually surrender emission allowances (EUA) for an increasing share of their emissions: 40% in 2024, 70% in 2025 and 100% in 2026. The inclusion of smaller vessels and non-CO2-emissions such as methane and N2O will likely start from 2026 onwards.

Next to this new inclusion, the overall ambition of emission reductions until 2030 compared to 2005 under the EU ETS increased to 62% (Figure 1). The agreement reached on 18th of December 2022 would thus lead to about 23 million tons less CO2-emissions compared to the EU Commission’s proposal from 2021 and is much more aggressive than the minus 43% that has been the previous reduction target. While the target is politically ambitious, it still falls short of the necessary reductions in the EU to limit global warming to 1.5°C even without taking into account fair share considerations.

To achieve this stronger reduction of 62%, the legislators agreed on a rebasing of emissions: 90 million EUA are taken out of the market in 2024 with another 27 million EUA following in 2026. In addition, the entire emission cap will be reduced by 4.3% annually from 2024 to 2027. From 2028 onwards this linear reduction factor (LRF) will even rise to 4.4%. As expected, the market stability reserve (MSR) will continue to take out 24 % of surplus EUAs.

Figure 1: Emission reductions targets under the EU ETS I (source: European Union)

All these reductions will lead to significantly tighter supply of EUAs, drive prices and incentivise more decarbonisation especially in industrial sectors. This brings us to the changes for the industrial sector.

Fundamental change for the industrial sector

Most of the industrial sectors under the EU ETS are currently still eligible for free allocation of EUAs. Based on benchmarks on efficient and thus less emission-intensive production, different industrial facilities will still receive free allowances. However, the benchmark system will be overhauled in 2026: the basis for the free allocations will not be a production process, but the product. This facilitates a better comparison between industries. In addition, industrial companies must have energy audits in place and implement related decarbonisation measures. Otherwise, the free allocation volumes of a facility will be reduced by 20%. Similarly, industrial facilities that are among the worst 20% in terms of carbon-intensity in one sector have to design and implement decarbonisation plans, otherwise their free allocations will be cut by 20%.

However, the biggest change will be the phase-out of free allocations for industrial players as such. From 2026 onwards, the number of free allowances handed over to industries will be reduced gradually until 2034 when industries have to procure all of their needed allowances through the auctioning mechanism or on the market. Free allocation will be part of the history books. As becomes clear from Figure 2 below, the phase-out of free allocation for industry starts relatively slowly compared to the phase-out for aviation and picks up speed from the end of the decade. This approach postpones that necessary price signals kick in for industrial polluters while allowing the EU industry to prepare and decarbonise in earnest during the next five years.

Figure 2: Share of free EUA allocations over time in aviation and industry (source: carboneer)

The EU Commission expects that about 75 million more EUAs will be auctioned due to the phase-out of free allocations to industry, increasing the auction income. Half of that income should go into the EU Innovation Fund that supports these very industries with the implementation of decarbonisation projects. The other half will be available for the EU member states to support their exporting industries. Which leads us to the next large update as phasing out free allocations is tightly coupled with the introduction of the carbon border adjustment mechanism (CBAM).

CBAM: pricing imported emissions

At the same time and rate as European industries will not receive free allocations of EUA anymore, importers of certain goods into the EU will have to pay for the emissions of their products. This carbon border adjustment mechanism (CBAM) should on the one hand create a level-playing field between EU and non-EU industries for products in the EU (both paying a similar carbon price) and increase climate ambition in non-EU states (climate instruments and carbon pricing abroad can reduce necessary payments for importers).

Initially, CBAM will cover the most emission-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity. The new agreements from 13th of December 2022, however, also feature hydrogen, certain precursors and other downstream products such as screws and bolts as imports under CBAM. In addition, the EU Commission will assess the inclusion of other products that might be at risk of carbon leakages such as organic chemicals and polymers into CBAM from 2030 onwards. Indirect emissions at the production facility also might have to be part of the emissions to be reported and consequently paid for by importing companies. From October 2023 importers in the covered sectors must be ready for their monitoring, reporting and verification (MRV) obligations, which start 3 years ahead of the pricing mechanism. Figure 3 depicts the timeline of the CBAM implementation.

Figure 3: CBAM implementation timeline (source: carboneer)

Two main contentious issues remain for CBAM:

  • How will reporting and verification methods and schemes really look like and work for imported goods?
  • How to compensate or support companies that produce in the EU and must purchase EUAs but export to non-EU countries where no or less ambitious carbon pricing rules exist?

Next to those sectors that are already under the EU ETS, a lot of emissions from other activities in the EU are not part of an emission pricing scheme. After much uncertainty about its prospects, it is now clear: a new or second emission trading system (EU EHS II) will be implemented as well. This will be the topic of our second article.

Feel free to get in touch if you want to learn more. We at carboneer are looking forward to supporting you in all questions on the existing and upcoming carbon pricing schemes in the EU.