EU Releases Methodology for Carbon Border Adjustment Mechanism (CBAM)

The EU has released a methodology for calculating carbon emissions embedded in products to be imported into the EU as part of Carbon Border Adjustment Mechanism (CBAM) that came into effect in October 2023.

Since October, importers of goods in certain sectors have needed to calculate the amount of carbon emitted during the production of goods being imported into the EU and the newly released methodology will enable them to make the necessary calculations.

The CBAM puts a tariff on the amount of carbon emitted during the production of goods being imported into the EU and is designed to stop a loophole that undermines the EU’s carbon emissions reduction efforts.

The CBAM will be phased in, with six sectors initially required to calculate and report emissions quarterly in their imported products based on the newly released “default reference values”. These sectors are cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. However, this reporting method will only apply until July 2024. After this, producers will have to use a different method to calculate values or another method deemed equivalent by the EU.

Once a permanent system enters into force on 1 January 2026, importers will need to declare the embedded greenhouse gas emissions embedded into any product imported into the EU in the previous year. They will be able to buy certificates, the price for which is based on the weekly average auction price of EU Emissions Trading Scheme (ETS) allowances and use these certificates to pay the levy.

Initially proposed in 2021, the CBAM is an adjustment mechanism designed to stop businesses from moving carbon intensive production activities outside the EU to avoid carbon control regulations under the ETS. It is designed to stop carbon leakage, where businesses relocate production of high carbon intensive products to other countries with more relaxed emission constraints. The result is avoidance of the EU’s tighter regulations and an undermining of the ETS.

Initially producers will have to calculate both direct and indirect emissions. Direct emissions are those generated during the production processes of CBAM goods, including from the production of heating and cooling. Even if the production of heating and cooling takes place outside the installations, resulting emissions are counted as direct emissions. Indirect emissions cover the production of electricity consumed during the production of goods. However, during the latter phase starting on 1 January 2026, producers will only have to calculate direct emissions for iron/steel, aluminium and hydrogen, while importers of cement and fertilisers will have to declare both direct and indirect emissions.

How it Works

> From October 2023, producers and importers of goods in the cement, iron and steel, aluminium, fertilisers, electricity and hydrogen sectors will have to calculate and report on a quarterly basis direct and indirect emissions produced during the production of those goods. They will have to register and report with a relevant regulatory authority in the EU country the goods will be imported to.

> Until the end of 2024, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method); (b) reporting based on an equivalent method (three options); and (c) reporting based on the newly released default reference values (which will only apply until July 2024).

> As of 1 January 2025, only the EU method will be accepted and estimates (including default values) can only be used for complex goods if these estimations represent less than 20% of the total embedded emissions. Goods are classified as either simple or complex and different rules apply to each. 

> From January 2026, EU importers of goods will need to be registered in the CBAM register with national authorities. They will be able to buy CBAM certificates to pay for the carbon levy. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted from the cost.

The CBAM is also intended to complement the EU’s key policy for GHG reduction, the EU Emissions Trading System. The CBAM will be aligned with a phase-out of the allocation of free allowances under the scheme to support the decarbonisation of EU industry.

The Carbon Leakage Problem

The CBAM is designed to prevent businesses moving carbon intensive production outside the EU to less regulated markets and then importing the products produced as a result back into the EU. Businesses to date have been able to relocate production to other countries with lesser emissions regulation. The EU’s energy-intensive industries alone make a significant contribution to total EU greenhouse gas (GHG) emissions and the potential for “carbon leakage” can undermines the EU’s target to reduce emissions by 55% below 1990 levels by 2030.

Where to Report

The European Commission has developed a CBAM registry to help importers perform and report as part of their CBAM obligations. Access to the registry should be requested through the National Competent Authority (NCA) of the country in which the importer is based.

CBAM Transitional Registry – Link for Importers

CBAM reporting declarants will find in the CBAM Transitional Registry User Manual an XSD file describing the full structure of the CBAM quarterly report, as well as a sample ZIP file, which may be uploaded in the Registry to fill in automatically the quarterly report’s data. The XSD and the sample ZIP files can also be downloaded here. 

Key Documents

The default reference values for the transitional period of the CBAM between 1 October 2023 and 31 December 2025 are here.

The method for calculating embedded emissions is in Annex IV of the CBAM Regulation (EU) 2023/956.

The EU legislation enacted to spell out the rules for the transitional period can be found here.

Questions and Answers: Carbon Border Adjustment Mechanism (CBAM)