Environmental Impact Data

Series

08. EU Carbon Border Adjustment Mechanism (CBAM)

Part 8 of 12

Overview. The EU CBAM is designed to prevent carbon leakage by equalizing the carbon cost of imports with the EU ETS. It applies initially to sectors such as cement, steel, aluminum, fertilizers, hydrogen, and electricity, and gradually phases in financial obligations by 2026.

1) CBAM Coverage

  • Sectors: Cement, iron & steel, aluminum, fertilizers, hydrogen, electricity (initial scope).
  • Geography: Applies to imports into the EU customs territory.
  • Entities: Importers (authorized CBAM declarants) responsible for reporting and surrendering CBAM certificates.

2) CBAM Reporting Framework

  • Transitional period: 2023–2025 → quarterly reporting only (no payments).
  • Financial phase: From 2026 → importers must surrender CBAM certificates annually.
  • Certificates: Priced in line with EU ETS allowance average (weekly published).

3) CBAM Calculation Formula

The number of CBAM certificates required is proportional to the embedded emissions of the imported product minus any carbon price already paid in the country of origin.


CBAM Certificates = (Embedded Emissions × Imported Quantity) × (1 – Adjustment for Carbon Price Paid Abroad)

Definitions:

  • Embedded Emissions: tCO2e per ton of product (direct + indirect emissions).
  • Imported Quantity: Tons of product imported into EU.
  • Carbon Price Paid Abroad: Effective carbon price (€/tCO2e) already applied in the country of origin, recognized by the EU.

4) Worked Example – Steel Import

Scenario: An EU importer brings in 10,000 tons of hot-rolled steel from Country X.

  • Embedded emissions = 2.1 tCO2e/ton.
  • Quantity = 10,000 tons.
  • Carbon price paid abroad = €10/tCO2e.
  • EU ETS average price = €90/tCO2e.

Step 1: Calculate total embedded emissions.


Total Embedded Emissions = 2.1 × 10,000 = 21,000 tCO2e

Step 2: Certificates required before adjustment.


Certificates (gross) = 21,000

Step 3: Adjustment for carbon price paid abroad.


Adjustment factor = (EU ETS price – Foreign carbon price) / EU ETS price
                  = (90 – 10) / 90
                  = 0.8889
Certificates (net) = 21,000 × 0.8889 ≈ 18,667

Thus, the importer must surrender ≈ 18,667 CBAM certificates.

5) Embedded Emissions Calculation

Embedded emissions are based on direct and indirect emissions per ton.


Embedded Emissions = Direct Emissions + Indirect Emissions

Direct Emissions   = Fuel consumed × Emission factor
Indirect Emissions = Electricity consumed × Grid emission factor

Example – Aluminum Smelter:

  • Fuel: 5 GJ natural gas/t with EF = 0.056 tCO2e/GJ → 0.28 tCO2e/t.
  • Electricity: 14 MWh/t with EF = 0.4 tCO2e/MWh → 5.6 tCO2e/t.

Embedded Emissions = 0.28 + 5.6 = 5.88 tCO2e/t aluminum

6) Interaction with Free Allocation

As free allocation under EU ETS is phased out for domestic producers, CBAM ensures parity by imposing equivalent carbon costs on imports. This prevents carbon leakage while maintaining competitiveness of EU industry.

7) Compliance Considerations

  • Quarterly reporting must include verified embedded emissions per shipment.
  • If actual data unavailable, default values published by the EU may be used (often conservative, i.e., higher).
  • Importers must establish robust supply chain data collection and verification processes.
Key takeaways.
  • CBAM aligns import carbon cost with EU ETS, starting with key carbon-intensive sectors.
  • Certificates required = Embedded emissions × Quantity – credit for foreign carbon price.
  • Worked examples show significant financial impact (e.g., tens of thousands of certificates for steel/aluminum imports).
  • High-quality data collection and verification is essential to avoid penalties and overpayment.

Note: CBAM is phased in from 2023 reporting → 2026 financial obligations. The mechanism is designed to complement EU ETS free allocation phase-out.