 lays the groundwork for the transition period between 1 October 2023 and 31 December 2025. During this time, while there is no CBAM certificate surrender obligation, the monitoring, reporting, and verification (MRV) of emissions embedded in imports of aluminium, cement, iron and steel, electricity, fertilisers, and hydrogen will be required.

The objective of this transitional period is to serve as a pilot and learning period for all stakeholders and collect information on embedded emissions to refine the methodology for the definite period. Already during the transition period, competent authorities in the Member States can impose penalties if importers of CBAM goods do not submit CBAM reports. The first reports are due to be submitted by 31 January 2024 for the goods imported during the fourth quarter of 2023.

 details calculation methods for embedded emissions, while the guidance documents for installation 

 (p.71) clarify aspects of CBAM implementation. In cases of a direct link to power generation (for non-electricity products) or the use of PPAs, an installation may use the actual data as opposed to relying on default values. 

This opens the door for market-based instruments

 such as PPAs but the Commission specifically excludes GOs to manage the carbon intensity CBAM-covered goods imported to the bloc.

In CBAM, the concept of embedded emissions is based on but does not entirely copy the carbon footprint of products (CFP) approach. A CFP is calculated as an amount of GHG emissions per declared unit (i.e., tCO2e per tonne of good) based on a life cycle perspective covering all emissions from upstream and downstream processes, i.e., the entirety of GHG emissions from Scope 1 to Scope 3.

By contrast, embedded emissions in CBAM are understood as direct emissions released during the production of goods (Scope 1) and indirect emissions from the electricity generation consumed during the production processes of these goods (Scope 2). The difference in approach (exclusion of Scope 3) is to reflect the same emissions as would be covered by the EU ETS if the production were situated in the bloc.

For CBAM-covered goods, the starting point of emissions calculation is at an installation. Its emissions are then split into those of its production processes. Any relevant embedded emissions of precursor materials (i.e., input goods) are then added and the result is divided by the activity level of each production process, thereby resulting in “specific embedded emissions” of the goods.

Note, CBAM treats electricity in two ways: first, as an input to produce CBAM–covered goods, and second, as a good itself i.e., imported electricity. Our

 reflects the Commission’s approaches to calculating the carbon intensity of imported electricity and electricity used to produce CBAM goods.

Where actual embedded emissions are reported, The Commission explains that “

market-based specific emission factors, determined e.g., by “guarantees of origin” or “green certificates” etc. are not allowed

”. In other words, third-country producers and importers of aluminium, iron and steel, fertilisers, cement, and hydrogen, cannot use GOs to lower the carbon intensity of their products but can instead opt to conclude PPAs. Veyt understands that this is because there is not a transparent and well-regulated global EAC market.

During the first year of implementation (October 2023 – October 2024), importers will have the choice of reporting in three ways: 1) full reporting according to the new methodology (EU method), b) reporting based on equivalent third-country national systems, 3) reporting based on reference values. Afterwards, only the EU method will be accepted.

) apply to imported electricity if the third country’s electricity market is integrated with the EU market and meets certain conditions related to climate and energy legislation, mainly market coupling. Annex II, Section 2 of the CBAM regulation, where exempted countries and territories would be listed, currently sits empty.

Although there is no market coupling between the Energy Community countries and the EU now, they could seek this exemption once they’re done

 implementing and transposing the Third Energy Package

complete market integration by the end of 2025

, this exemption could be applicable right before CBAM is launched. Nevertheless, the contracting parties have a long way to go before fulfilling all exemption conditions with a common regional strategy likely to achieve better results than the initiative taken by individual countries.

The UK will not be subject to exemption: post-Brexit, energy trading through electricity interconnectors between the EU and Great Britain is no longer managed through existing single market tools, such as EU market coupling. Only Northern Ireland remains part of the single electricity market with Ireland, an EU Member State, meaning it will likely be exempt from the EU CBAM for imported electricity.

Other CBAM–covered goods. Article 2(7) lists full linking between the EU ETS and the third country or territory emission trading systems, or payment of carbon price in a third country or territory, as grounds for CBAM exemption in the first case, or lessening of the “carbon burden” in the second case. CBAM does not apply to imports of covered goods from countries that apply the EU ETS (Iceland, Norway, and Liechtenstein) or have an ETS fully linked to the EU ETS (Switzerland). Although Northern Ireland remained within the EU ETS post-Brexit, the country is not presently on the “exception” list. The Union would need to conclude agreements with third countries with a view to taking account of carbon pricing mechanisms in these countries.

The CBAM “playbook” shines a light on how to do carbon intensity management a la EU. The higher the carbon intensity of a CBAM good, the more CBAM certificates an importer would need to surrender. To lower the “carbon burden” of a CBAM good, on a national level, the carbon price of third countries with an ETS system or carbon tax in place would be subtracted from the EUA price.

Most jurisdictions in the world do not have carbon prices close to EU levels, meaning that the difference would need to be paid out, regardless. Looking at the biggest exporters of CBAM goods to the EU, only a handful of countries have a functioning nationwide ETS in place, such as China, S. Korea, and the UK. However, the sectors covered are not necessarily the same as under EU ETS. This is where market instruments such as PPAs would have a role to play.

On a microeconomic level, producers of CBAM-covered goods that are exported to the EU can 

 by lowering their direct and indirect embedded emissions. Securing electricity from renewable and other low-carbon sources via PPAs (but not unbundled EACs) is an alternative to managing the exposure to the carbon price of CBAM. Producers would otherwise have to rely on default values established under the CBAM Regulation.

Quarterly reporting starts as of October 2023 with no financial obligations, thereby not incentivising market players to manage the intensity of their products in the short run. We, therefore, expect the market impact to materialise from 2026 onwards with the PPA demand augmenting and the PPA market potentially developing in the affected countries; in the meantime, CBAM exporters could start exploring green energy procurement options.

 (from 15 September to 5 October 2023), covering CBAM's general features as well as the specifics of each sector. Specifically, the CBAM transitional period, rules, implications and reporting requirements for importers, exporters, and producers of CBAM-covered goods from the EU and third countries were addressed.

Later, the Commission will evaluate the CBAM Regulation by mid-2025 with a view to defining the final methodology to be used before CBAM’s launch on 1 January 2026 and provide a timetable setting out the inclusion of additional CBAM goods by 2030, such as glass and chemicals, which are covered under the EU ETS.

In the meantime, Poland filed a request to annul the CBAM Regulation with the European Court of Justice arguing that a fiscal voting procedure should have been used, requiring that all 27 EU Member States unanimously agree to pass (instead, a majority vote was secured).

If the annulment is granted, the CBAM regulation can be annulled in full or in part from the moment of its adoption. Based on similar actions, it can take more than two years for a judgment to be rendered; the contested rules are generally not suspended during the period.

Short-term, the complaint has no immediate impact, although it could jeopardise CBAM in the medium term, as full or partial withdrawal of the CBAM Regulation would undermine the competitive advantage of European producers that are subject to the EU ETS regulation, whose free allowances will be fully phased out between 2026 and 2030.

Thus far, no litigation cases have been brought up with the World Trade Organisation (WTO); although concerns were raised by India and China during discussion meetings at the WTO level.

News

German 2030 solar target out of reach despite accelerated capacity growth

November 2023 - GO Market Overview

GO Week 48 Update - 2024 GOs dominate a contrasted trading week

Week 48: Mixed signals in future contracts while anticipation grows for COP28

Week 48: Washington regulators release draft legislation to align program with California and Quebec

Week 48: Contract prices ease ahead of Q4 auction 

Week 48: prospect of gas burn set to weigh on EUAs, technicals suggest downside room

VCMI releases Carbon Integrity Claims Branding and Monitoring, Reporting and Assurance Framework 

Biomethane Monthly Update - November 2023

Article 29a tracker

Supply - MSR data

Options data

EAC Market Report - In The Midst Of A Bullish Wave

A platform with real-time GO data and insights, reporting prices and market fundamentals for Wind, Hydro, Solar, Biomass, Biomethane and RGGOs. 

Our community offers access to webinars, discussions and updates from industry leading experts and analysts. 

On 17 August 2023, the Commission released the first set of secondary legislation that will govern the implementation of the Carbon Border Adjustment Mechanism. The rulebook reaffirms the role of PPAs for carbon intensity management of imported electricity and electricity used in the production process of some other CBAM-covered goods.

Our Platform gives you unfettered access to price benchmarking, analytics, new and insights covering the green certificates markets. 

Request a demo now and someone from our team will be in touch with you to learn more about your involvement in the markets and to answer any questions you may have.

News

CBAM implementing regulation reaffirms the role of PPAs for carbon intensity management, excludes EACs

To read this article and explore our services, request a demo!

Related reading