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 to 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. The tables below detail the methodology to calculate the carbon intensity of imported electricity and electricity used to produce CBAM goods.

CBAM default values for electricity

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.

Conditions for actual embedded emissions

) 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 i

mplementing 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.

 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 (see below), 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 for import into the EU can 

 by lowering their direct and indirect embedded emissions. Securing electricity from renewables 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.

 (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 will be 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.

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While there are still details to be ironed out ahead of the 1 January 2026 deadline for the start of CBAM implementation, it is clear that most jurisdictions in the world will have to take steps to manage their exposure to the European carbon price which is currently unmatched, with PPAs a key instrument.

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CBAM playbook shines a light on how to do carbon intensity management à la EU

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