2024-03-07
Supply Chain
What means the Carbon Border Adjustment Mechanism for Scope 3 Decarbonization?
The EU Carbon Border Adjustment Mechanism (CBAM) significantly influences the transition towards a climate-compatible economy. Why? CBAM ensures that goods imported into Europe align with its commitment to carbon pricing.
Find in the following a short CBAM Overview as well as a Deep Dive to accelerate your Supply Chain Decarbonization Journey!
Live CHOICE Webinar, Event #70 on 7th March 2024, with Finn Ströhnisch and Yasha Tarani.
1️⃣ 𝗔𝗱𝗱𝗿𝗲𝘀𝘀𝗶𝗻𝗴 𝗖𝗮𝗿𝗯𝗼𝗻 𝗟𝗲𝗮𝗸𝗮𝗴𝗲 & 𝗖𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗶𝘃𝗲𝗻𝗲𝘀𝘀 𝗗𝗶𝘀𝘁𝗼𝗿𝘁𝗶𝗼𝗻
CBAM aims to prevent carbon leakage, which occurs when companies relocate production to countries with less ambitious climate policies to avoid carbon costs.
2️⃣ 𝗣𝗵𝗮𝘀𝗲𝗱 𝗜𝗺𝗽𝗹𝗲𝗺𝗲𝗻𝘁𝗮𝘁𝗶𝗼𝗻
CBAM will be introduced in two phases. In October 2023, a reporting phase came officially into application. The full implementation is scheduled for 2026.
3️⃣ 𝗧𝗮𝗿𝗴𝗲𝘁𝗲𝗱 𝗣𝗿𝗼𝗱𝘂𝗰𝘁𝘀
CBAM will initially apply to a limited number of high-emission products, including cement, fertilizers, steel and ferrous metals, aluminum, hydrogen, and electricity.
4️⃣ 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝘁𝗵𝗲 𝗘𝗻𝘁𝗶𝗿𝗲 𝗦𝘂𝗽𝗽𝗹𝘆 𝗖𝗵𝗮𝗶𝗻
Businesses will now have to undertake detailed carbon accounting throughout their entire supply chain. Companies not initially included in the CBAM scope may also experience the impact of carbon costs being passed down the production chain.
5️⃣ 𝗘𝗻𝗰𝗼𝘂𝗿𝗮𝗴𝗶𝗻𝗴 𝗚𝗹𝗼𝗯𝗮𝗹 𝗔𝗱𝗼𝗽𝘁𝗶𝗼𝗻
CBAM not only sets new standards within the EU but also encourages Europe's trading partners to implement similar measures.
6️⃣ 𝗕𝗮𝗹𝗮𝗻𝗰𝗶𝗻𝗴 𝗚𝗹𝗼𝗯𝗮𝗹 𝗧𝗿𝗮𝗱𝗲 & 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗚𝗼𝗮𝗹𝘀
CBAM contributes to the ongoing debate about finding a compromise between global trade governance and climate policies. It exemplifies the EU's commitment to aligning economic interests with environmental objectives.
Here's your short CBAM Overview!
Supply Chain Guidance to Decarbonization
After the quick overview, let's prepare for the deep dive! Here's what you need to know about the key aspects of CBAM, its implications, and how technology can support enterprises in managing emissions and driving decarbonization.
Bringing EU Climate Goals into Actions
As part of the Fit for 55 package, the European Commission has introduced the Carbon Border Adjustment Mechanism, a crucial element aimed at addressing carbon leakage and enhancing the effectiveness of the EU Emission Trading System (ETS).
Key Components of CBAM
The CBAM, effective since January 1, 2023, operates alongside the EU ETS, extending its reach to maritime transport and introducing emissions trading to the buildings and road transport sectors. The revision of the EU ETS sets ambitious targets, proposing a 61% reduction in emissions from current EU ETS sectors by 2030 compared to 2005 levels. This entails a steeper annual emissions reduction of 4.2%, signifying a more stringent cap on emissions.
Transitional Phase
The transitional phase, spanning from October 1, 2023, to December 31, 2025, is a critical period during which CBAM applies to specific goods. Importantly, affected goods include:
Iron
Steel
Aluminum
Iron ore
Hydrogen
Certain fertilizers
Electricity
Mineral products like cement.
This phase provides a window for affected companies to familiarize themselves with CBAM requirements.
Reporting Requirements
CBAM reporting focuses on raw materials and embedded process emissions. It includes:
Energy use
Embedded emissions
The country of origin,
and carbon pricing.
During the transition phase, companies are required to report on a quarterly basis.
Operators' Responsibilities
1️⃣ Monitoring direct emissions is a primary responsibility for operators, particularly when an installation produces multiple products. These emissions must be accurately attributed to individual products. Additionally, operators must monitor and report the quantities of specific input materials with embedded emissions, known as "relevant precursors." The embedded emissions of these precursors, when purchased to produce other CBAM goods, need to be obtained from the supplier.
2️⃣ Furthermore, operators are tasked with monitoring indirect emissions from electricity consumed during the production of all CBAM goods. This includes considering emissions embedded in precursors. The guidance document for operators provides detailed explanations on determining embedded emissions and defining system boundaries.
3️⃣ Operators are also required to communicate to importers the carbon price due for the production of the goods within their jurisdiction, including relevant details like the carbon price per tonne CO2e and any financial support or rebate received.
Importers' Reporting Obligations
During the transitional period, importers play a crucial role in reporting on a quarterly basis the embedded emissions in goods imported. This includes both direct and indirect emissions, along with the carbon price due abroad. Importers must report:
The total quantity of each type of goods, specified per installation producing the goods in the country of origin.
Actual total embedded emissions per MWh of electricity or per tonne of each type of goods.
Total indirect emissions, including electricity consumed and the applicable emissions factor.
Carbon price due in the country of origin for the embedded emissions in the imported goods, considering relevant rebates.
To streamline the reporting process, importers should establish clear procedures for monitoring imports. Best practices include implementing tools that automatically generate lists of goods falling under the CBAM, possibly integrated into bookkeeping software or outlined in purchase contracts with producers.
Impact on Emerging Markets
International suppliers will face significant challenges as they adapt to the new carbon pricing mechanism. Companies importing goods to the EU must pay for the carbon contained in their supply chain, initially covering 2.5% of embedded emissions in 2026, gradually increasing to 100% by 2034.
Setting up Solutions at Scale
The key to success lies in collaboration. Companies affected by various reporting obligations, such as EU Taxonomy, CSRD and now CBAM, should assess data compatibility and identify areas for synergy. Engaging with suppliers to align Climate Targets, Emission Data Reporting and Decarbonization Actions is crucial for achieving transparency and reducing emissions along the supply chain.
Technology plays a pivotal role in simplifying these challenges. Our Climate Intelligence Platform offers support in the collection of primary supplier data, understanding supply chain emissions and aligning roadmaps to implement actions. Leveraging AI thereby allows you to automate data validation, emission management and scenario analysis - significantly easing the burden of reporting, enhancing efficiency and increasing accuracy.
Conclusion
As CBAM brings forth intricate monitoring and reporting requirements, collaboration between operators and importers becomes paramount. Establishing transparent communication channels, leveraging technology, and adhering to best practices will be pivotal in successfully navigating complexity.
Moreover, CBAM is another example why it is essential for businesses to improve the transparency of their supply chain’s climate impact and work together towards cost and emission reduction.
