Tag Archive for: Carbon Markets

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.

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Carbon markets: Which role does biomass play?

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Although compliance and voluntary carbon markets vary in scope, mechanisms and participants, biomass occupies a unique place. In compliance carbon markets such as the EU ETS, participants are obliged to monitor and report their emissions and ultimately pay for them. Using biomass in industrial facilities can allow for reduced financial burdens. Regulators set rules around biomass use and sustainability criteria to comply with. A large part of voluntary carbon market credits is generated by nature-based solutions, including forestry and other biomass-related projects. These projects are however under intense scrutiny due to issues regarding transparency and associated climate claims. Novel carbon removal solutions with biomass as feedstock show promising development and renewed regulatory oversight could restore trust.

Which CO2 and which carbon markets?

To assess the relevance of carbon markets for biomass and vice versa, requires an understanding of different types of emissions and how carbon markets account for them. The sources of CO2 emissions and their final sink can be categorized into four main pathways (Figure 1).

  • Unabated carbon emissions from fossil sources add emissions to the atmosphere (grey and black)
  • Abated emissions from fossil sources through carbon capture and storage (CCS) with long-term storage might not add additional GHG emissions to the atmosphere (purple)
  • Negative emissions through nature-based or technological carbon dioxide removal (CDR) solutions taking CO2 out of the atmosphere and storing it durably (green)
  • Utilisation of CO2 through carbon capture and utilisation (CCU) technologies, where the ultimate source of the CO2 (atmospheric or fossil) and the final product into which the CO2-molecules has been transformed determine the climate impact (blue)

Detailed analysis of the technological pathways, supply-chain emissions, and substitution effects is required to establish emission reduction potentials of these solutions.

Figure 1: Different pathways of CO2: fossil emission, CCS, CCU and carbon dioxide removal. Source: carboneer

Compliance and voluntary carbon markets both incentivise emission reduction or carbon removal, however each from a different angle. Compliance carbon markets aim to fulfill national or regional climate targets. By putting a price tag on emissions and they incentivise compliant actors to reduce their emissions in a cost-efficient way. The mechanics of voluntary carbon markets (VCM) aim at financially supporting projects that either reduce emissions or provide negative emissions through CDR. Private actors can purchase carbon credits from project developers to offset or neutralise their corporate emissions.

The EU ETS: zero rating for biomass

The EU ETS is one of the largest and most mature compliance carbon markets. Since its inception in 2005, the EU ETS has been a cornerstone of EU climate policy, covering 35-40% of the region’s emissions. Large industrial facilities, such as steel mills, chemical plants, cement kilns, and power plants as well as aviation and maritime transport operators need to monitor and report their annual emissions. For each ton of CO2-eq emitted, the compliant entity must surrender an emission allowance. The price of this allowance is determined at the market. Currently, many industrial facilities still receive free allowances. To prevent carbon-leakage while facing out this free allocation, the Carbon Border Adjustment Mechanism (CBAM) requires importers of certain goods from non-EU countries to report the embedded carbon emissions in imports and from 2026 onwards also to pay the same carbon price as EU-based industry. Most emissions from buildings and road transport in the EU are not yet subject to a carbon price. This changes with the new EU ETS 2 covering another 35-40% of the EU’s GHG emissions. Since 2024, suppliers of liquid, gaseous or solid fuels are required to monitor and report emissions released by their fuels at the end-user. Pricing in the EU ETS 2 starts in 2027.

Carbon in biomass ultimately comes from the atmosphere. When combusted, only CO2 stored in the biomass is released back to the atmosphere. However, for a comprehensive life cycle assessment, factors such as land-use emissions due to biomass harvesting or emissions along the value chain need to be considered. According to current regulations, emissions from biomass and biofuels in the EU ETS 1, CBAM and EU ETS 2 can generally be counted as zero, thus reducing the number of allowances to be purchased by compliant entities and reducing their costs (Figure 2). Depending on the type of biomass and its utilisation, compliance with the Renewable Energy Directive for sustainability or GHG saving criteria needs to be achieved.

Figure 2: Criteria for biomass utilisation in the EU ETS 1. Source: carboneer

VCM: Carbon removal with biomass

Forests, mangroves, biochar kilns and waste-to-energy plants with CCS all have in common that they are examples of biomass-based project on the VCM. Private entities purchase carbon credits from project developers to offset or neutralise their (hard-to-abate) emissions. These projects either reduce emissions or remove CO2 from the atmosphere and must follow certain standards and methodologies for project set-up and emission calculation. Third-party verification of the projects’ climate effects is needed to create trust and transparency in voluntary carbon markets where regulatory oversight is only rudimentary.

While a wide range of VCM methodologies and projects exist, biomass-based projects are ubiquitous and particularly divers. Many biomass VCM projects potentially create negative emissions (to stay within the targets of the Paris Agreement, estimates for the required global carbon removal capacity range from 5-10 Gt/year or 5-20% of today’s total emissions). While trees might store atmospheric carbon for decades, technological solutions, such as pyrolysis with biochar or bioenergy with CCS remove carbon for hundreds or thousands of years. Project developers and buyers of credits on the VCM need to navigate complexities arising from cost considerations, project types and quality, and applicable methodologies and standards (Figure 3).

Figure 3: Carbon removal solutions and considerations for VCM projects. Source: carboneer

To reduce the lack of credibility that has plagued the VCM and associated climate claims of credit buyers, the EU currently develops its own methodologies under the Carbon Removal Certification Framework. As corporates are increasingly under pressure to develop credible climate strategies, carbon removal solutions utilising biomass have their role to play. Several announcements of large-scale credit purchases by corporates from biochar and bioenergy with CCS project developers underscores that point.

Biomass and carbon markets: the take-aways

CO2 is not CO2: The ultimate origin of the molecule matters. Compliance and voluntary carbon markets assess emissions from different perspectives and objectives. Due to the wide array of biomass applications, rules on eligibility as well as on emission accounting in compliance and voluntary carbon market differ. Biomass use in the ETS can reduce costs for industrials and allow for decarbonisation at the same time. Biomass enables carbon removal solutions, but stakeholders need to navigate the murky waters of voluntary carbon markets. Finally, interactions between the EU ETS and the VCM might be restored against the backdrop of industrial carbon management policies, the need to scale carbon removal and to provide market stability in the ETS. Complexities abound when biomass meets carbon markets.

This article appeared first in Bioenergy International No 1-2024

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Carbon. Removal. Accelerated.

With this motto, our goal is to counter climate change also with carbon removal and negative emissions. carboneer guides your company through carbon markets, negative emissions and climate strategies.

But first things first: 

What is Carbon Removal and how does taking CO2-emissions out of the atmosphere relate to global climate goals?

CO2-emissions back at pre-Corona levels

Looking back at the past year, the Corona pandemic will probably be the most remembered thing of 2020. And in the public perception, the pandemic and its effects seem to have displaced climate change as the biggest challenge.

As a result, global energy-related CO2-emissions also fell by about 6 percent in 2020 compared to 2019. Due in particular to lockdown restrictions and the economic crisis, energy-related emissions fell by more than 2 gigatons in 2020 to just over 30 gigatons. No one expected such a drop in emissions in early 2020. In fact, some countries, such as Germany only achieved their climate targets as a result of the Corona crisis. Otherwise emissions would not have dropped that much. 

However, a look at the latest figures and statistics reveals that energy-related CO2-emissions have been back at the previous year’s level since December 2020 and could end up just 1 % below pre-Corona emissions of 2019 during 2021. 

Carbon Removal essential for climate goals

Let’s leave 2020 and 2021 behind for a moment and look at how CO2-emissions would have to develop to meet the Paris Climate Agreement’s 1.5 or 2 degree target. For that to happen, carbon emissions would have to decline globally by about the same factor (3-7 percent) each year for the next few decades as they did during the Corona pandemic.   

However, based on the most current plans of the various countries regarding their climate targets (Nationally Determined Contributions), it is more likely that the overall decrease in emissions will be no more than 2 percent by 2030 compared to today. This corresponds to a temperature increase of 2.4 ˚C from pre-industrial levels. Because of these realities, the discussion about large-scale atmospheric removal of CO2 through negative emission technologies is gaining momentum. 

Necessary order of magnitude for carbon removal for an emission path of 2 °C (Data source: NGFS (Network for Greening the Financial System) Scenario Explorer. Model: REMIND-MAgPIE 1.7-3.0; provided by IIASA)

Carbon Removal solutions need support

All solutions are needed in the fight against climate change, from emission savings and reductions to the removal of greenhouse gases from the atmosphere. For a process or technology to be considered carbon removal, four conditions must be met:

  1. CO2 is physically removed from the atmosphere.
  2. the removed CO2 is permanently stored outside the atmosphere.
  3. emissions generated during the process are included in the overall balance.
  4. emissions generated during the process are less than the negative emissions produced.

However, scaling and application of the various nature-based and technological solutions to remove carbon dioxide from the atmosphere are still in their infancy.

Selected negative emission technologies

Based on scientific research from the IPCC reports, these negative emission technologies will need to remove and permanently store several gigatons of CO2 per year from the atmosphere over the coming years and decades. This is roughly equivalent in magnitude to the decline in CO2-emissions caused by the Corona pandemic, the largest economic collapse since the 1930s. 

 

carboneer: the experts on CO2 markets and negative emissions

Against this background, Simon Göß and Hendrik Schuldt founded carboneer.

Our expertise covers mandatory carbon markets and negative emissions. Through our consulting services (link) we help companies to understand the complexity of carbon markets, to meet the legal requirements and to successfully use negative emissions for the company’s climate strategy. 

Feel free to contact us with your questions.

Let’s take the next step towards solving the climate crisis together.

Your team from carboneer.

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