On December 7, 2023, ClearBlue hosted a panel discussion about the EU’s Carbon Border Adjustment Mechanism (CBAM). The speakers covered an enormous amount of information in a short hour, much of which came in question format from the audience. Answers to many of the questions are below.
We invite you to watch the recording by submitting a request to download it here. ClearBlue’s in-house CBAM experts can offer unique, technology-based solutions to help companies with their CBAM position, manage compliance obligations and build intelligence to optimize opportunities.
Q&A: DECODING CBAM
Q: What is CBAM?
A. With the Carbon Border Adjustment Mechanism (CBAM), the EU aims to protect itself from carbon leakage. It also seeks to replace the current ETS carbon leakage policies, which involve giving a large share of free allowances to heavy industries to prevent them from moving to locations with less stringent climate policies.
As the EU seeks to phase out the free allowances to incentivize industries to decarbonize, they decided to put the same carbon price on the industrial imports to prevent industries from moving their production elsewhere.
CBAM positions will have to be covered by CBAM certificates. Their price will be based on the weekly average EU ETS auction price to level the playing field between the imports and goods produced within the EU. CBAM certificates will be quite different from EUAs as they will have a 2-year validity and will be non-tradeable.
Q: Which sectors and products does CBAM apply to?
A. Initially, CBAM will cover six industries - iron and steel, fertilizers, cement, aluminum, hydrogen, electricity, and some downstream products such as pipes and bolts.
Q: What is your expected timeline for the expansion of CBAM to other industries, especially for energy?
A: The first review of CBAM’s scope will happen at the end of the transitional period (2025). The program will then be monitored yearly, with more products likely to be included each year until 2030.
Some products, such as organic chemicals and polymers, are expected to be added by 2026. Oil refining products are also expected to be added to the scheme sooner than later. The exact timeline of new product implementation is not clear however we do not anticipate a transitional period.
Note that extensions of the CBAM scope require a legislative proposal from the Commission followed by an amendment of the CBAM Regulation to be adopted by the EU Parliament and the Council.
Q: Will EU importers be able to use voluntary carbon offsets to cover their emissions and reduce their reliance on CBAM certificates?
A: Voluntary carbon credits will likely not be allowed. The EU Commission wants to ensure equal treatment of the EU industry and industry elsewhere, and the EU ETS does not allow voluntary certificates. The Commission’s position is that the carbon price paid has to be in the form of an allowance or levy under an emission reduction scheme. The EU will evaluate each scheme individually and decide whether it meets the EU standards.
In the case of Turkish ETS, we expect voluntary carbon units issued by registries, such as Gold Standard and Verified Carbon Standard, to be used in Turkey’s upcoming cap-and-trade under a certain cap. Therefore, this will bring an explicit discussion between Turkey and the EU to decide how to process this carbon flexibility mechanism.
Q: Will the EU ask for product-level GHG footprint, or could it be done at the asset level?
A: Direct and indirect emissions must be reported on a product level, as CBAM’s scope is defined by the CN codes for each type of industrial good. The information can be provided in one report even if an importing company’s CBAM scope includes multiple products. This structure is already visible in the Excel templates issued by the Commission for the transitional period reporting.
Q: When can we expect to receive the default values from the EU Commission?
A: The general expectation is that they will be published by the end of December 2023 since entities must submit their first quarterly report by January 31st, 2024. The Commission will use this Report to determine CBAM values.
Q: Has the WTO weighed in on CBAM? Is there a risk of CBAM being challenged at the WTO?
A: This was discussed in detail during the CBAM legislative period. To summarize, the WTO did not challenge CBAM as the EU will be phasing out the free allowances for its own industry at the same rate that the CBAM will be phased in.
This way, the EU complies with the WTO laws, which do not allow the EU to subsidize its own industry while taxing industrial imports. Nevertheless, other countries are attempting to challenge CBAM with the WTO and other organizations.
Q: Will CBAM payments include Scope 2 emissions (electricity)?
A: Initially, only the cement and fertilizer product emissions have scope 2 covered in CBAM. However indirect emissions for more industries might be included in the years to come.
Q: In terms of indirect emissions, is this as well defined as "Scope 2 or 3", or is it still to be established?
A: Yes. Scope 1 covers direct emissions generated during the production process of CBAM goods, including heating and cooling. Scope 2 covers Indirect emissions such as the production of electricity consumed during the production of CBAM goods.
Scope 3 emissions are only partially covered by CBAM: the embedded emissions of precursors are taken into account when the CBAM good is a “complex” good, meaning that it was produced using a product that already falls into the CBAM scope.
Q: Scope 3 emissions will take a lot of work to procure, especially related to complex goods. If this becomes impossible to be informed by the entity collecting emissions data, can defaults continue to be used as far as 2025? If not, what is the way around it? When can defaults be used to compensate for the lack of data?
A: Even beyond 2025, the importers will be allowed to use the default values for all scopes of emissions in cases where the exporter does not provide such information.
Q: Can CBAM drive long-term structural inflation in the EU?
A: CBAM could become a driver of inflation in the EU as exporters add the price of CBAM certificates to the cost of goods sold into the EU. Nevertheless, CBAM will not be fully phased in until 2034, and more industrial decarbonization technologies are expected to be economically viable by then. We may also see exporters choosing to export only the greenest products to the EU and exporting dirtier ones to countries without CBAM schemes or environmental import taxes, thus reducing the amount of CBAM certificates they need to purchase.
Q: It was mentioned that trading is not allowed. How will obligated parties purchase the certificates, and without trading, how will they be vaporized?
A: CBAM authorities will sell CBAM certificates on the CBAM registry. The price will be tied to EUA prices as it will equal the average EU ETS auction price of the previous week. The Commission will publish the CBAM certificate price for the week every Monday.
Q: Wouldn't other compliance mechanisms where trading is permitted compete to use the offsets that could be generated and used for CBAM?
A: Offsets may not be used to reduce the CBAM position thus, no competition is expected.
Regarding other compliance schemes, they only need to cover their compliance obligations within that scheme, which will reduce their CBAM position. However, their CBAM position will remain the same if they purchase more allowances from another compliance scheme as their compliance position within that scheme requires.
How can ClearBlue help?
ClearBlue’s team of in-house CBAM experts can offer unique, technology-based solutions to assist companies with CBAM obligations.
For more information, please contact us today.