Background

In our previous blog, we explored the basics of the Carbon Border Adjustment Mechanism (CBAM) and how it is all set to phase out the European Emissions Trading System EU ET slowly. Let’s look at what businesses must do to prepare for CBAM reporting.

Transitional Period Reporting - Where to Start

The transitional period from October 2023 to the end of December 2025 is meant for learning for manufacturers, importers, and authorities. Importers of CBAM goods into the EU or indirect customs representatives must report on the following:

• Total Quantity of the CBAM goods imported in tonnes from each installation based on the country of origin. If you are importing electricity, this should be expressed in MWh.
• Direct Embedded Greenhouse gas emissions (GHG) for the import.
• In-direct Embedded Greenhouse gas emissions (GHG) for the import.
• Carbon Price that has been paid in the country of origin.

The direct and indirect embedded emissions resulting from the production of the CBAM goods are derived using calculation methodologies provided by the European Commission in Annex IV of the CBAM legislative documentation.

What business must do?

The responsibility to report lies with the importer based in the EU or indirect customs representatives if the importer is outside the EU. Regardless of the situation, declarants require access to emissions data provided by manufacturers outside the EU to report on CBAM. Therefore, businesses and producers can keep track and report the embedded emissions of their products by following these steps.

1. Start understanding your obligations: The EU has published various resources to raise awareness and provide guidance on the CBAM regulation. APA recorded webinars that can help you better understand the regulation.
2. Identify if your products fall under the scope of CBAM:

a. Identify all the goods produced at the installation (this is your manufacturing site).
b. Identify the input materials like precursors used to produce the goods. These precursors, for example, pig iron used in manufacturing crude steel, have embedded carbon.
c. Please refer to Annex I of the regulation, which lists the goods covered under the scope of CBAM.

3. Understand how CBAM may affect your supply chain: Suppose you own a facility that produces crude steel using pig iron as the primary raw material. In this scenario, your suppliers must provide accurate information about their emissions. This information is crucial in determining your facility's emissions from crude steel production. Therefore, it's essential to have a comprehensive understanding of your supply chain to assess the impact of the regulations on your business.
4. Identify the system boundaries associated with the production process: System boundaries define the processes to be analyzed concerning material and energy flows and emissions. (Klaus Büchel). This means installations are required to define system boundaries, production processes, and routes.
5. Monitoring GHG Emissions: To determine the specific embedded emissions of goods being produced, monitoring the emissions from the production process is necessary. The manufacturing process used to produce goods can significantly impact the overall emissions. For instance, a steel production facility that uses an Electric Arc Furnace (EAF) will generate fewer emissions than one that uses a Basic Oxygen Furnace (BOF) for steel production, resulting in a lower environmental impact. Direct, indirect, and emissions from any precursor must be monitored.

a. Direct Emissions – Direct emissions associated with producing the CBAM good must be monitored, including emissions related to heat flows and waste gases, wherever relevant. For example, waste gases are used to heat the air for the blast furnace and to heat steel in the facility. Hence, emissions from waste gases must be determined. The emissions are then attributed to the goods produced.
b. Indirect Emissions – Emissions based on the electricity consumed to produce CBAM goods must be monitored. This would also include the indirect embedded emission of any precursor used in manufacturing.
c. Emission from precursors - Quantities of any input material, also called precursors, must be monitored and their embedded emissions determined. If the input material is purchased from the supplier, please request them to provide data on the embedded emissions of the precursor good.

EU has provided standard methodologies for monitoring and calculating direct greenhouse gas emissions.

1. Calculation-based methodology – This approach uses the quantities of all fuels and input materials consumed and corresponding calculation factors (like net calorific value and emission factors) to determine the GHG emissions.
2. Continuous emission monitoring – This approach measures the concentration of greenhouse gases and flue gas flow for each emission source.

If you cannot determine the embedded emission for a precursor like pig steel, you are permitted to use the default reference value based on the product code due to a lack of emissions data from your supplier. This value will provide information on the precursor's direct/indirect and total embedded emissions. However, this is applicable only until July 2024, after which businesses are required to provide actual estimates based on EU methodology.

6. Attribute Emissions to the installation and then to the goods. Once this is done, determine the specific embedded emission of the CBAM good. We have discussed the attribution of emissions and its calculation in our webinar.
7. Make sure to be ready for any carbon pricing that your facility may be obligated to pay, based on the country you operate in. Carbon pricing is a tool used to account for the external costs of greenhouse gas emissions. This data must be provided during CBAM reporting. (Though not mandatory in the transitional phase).
8. Make your data available to your indirect customs representative in the EU or an authorized CBAM declarant who will update the transitional registry and generate CBAM reports.

For in-depth information on Guidance for Non-EU installations, visit here.

Related Resources

• CBAM practical guide to business.

• CBAM to phase out EU ETS .

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