Carbon Border Adjustment Mechanism (CBAM): Pricing Imported Emissions

The Carbon Border Adjustment Mechanism (CBAM) is a landmark EU tool designed to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU. Its goal is to prevent 'carbon leakage'—the relocation of production to countries with weaker climate policies.

Covered Sectors

In its initial phase, CBAM targets sectors with high carbon emissions and high risk of carbon leakage:

• Iron and Steel
• Cement
• Fertilizers
• Aluminium
• Electricity
• Hydrogen

The scope is expected to expand over time to include other sectors covered by the EU Emissions Trading System (ETS), such as chemicals and polymers.

Phased Implementation

CBAM implementation is divided into a transitional phase and a definitive phase.

1. Transitional Phase (Oct 2023 - Dec 2025)

During this period, importers face reporting obligations but no financial adjustments. Importers must submit quarterly reports detailing:

• Total quantity of imported goods per country of origin.
• Total embedded direct emissions (and indirect emissions for certain goods like cement and fertilizers).
• Any carbon price paid in the country of origin.

2. Definitive Phase (Starting Jan 2026)

Importers will need to declare the quantity of goods imported in the preceding year and their embedded GHG emissions by May 31 each year. Importers must then surrender a corresponding number of 'CBAM certificates'.

Calculating Embedded Emissions

Calculating emissions requires obtaining verifiable primary data from non-EU installations. If primary data is unavailable or unreliable, default values established by the European Commission are applied. Default values are intentionally set high (reflecting the worst-performing installations) to incentivize the reporting of actual emissions.

Equation for total embedded emissions ($E$):
$E = Q \times (SEE_d + SEE_i)$

Where:

• $Q$ = Quantity of imported goods
• $SEE_d$ = Specific embedded direct emissions
• $SEE_i$ = Specific embedded indirect emissions (where applicable)

Pricing and Certificates

The price of CBAM certificates will be calculated based on the weekly average auction price of EU ETS allowances, expressed in €/tonne of CO2 emitted. If a carbon price has already been paid in the country of origin, a corresponding deduction can be claimed, reducing the number of CBAM certificates required.