Steel, cement, and ammonia are among the highest greenhouse gas (GHG) emitting commodities traded internationally. In 2017 steel, cement and ammonia production accounted for nearly 20% of global CO2 emissions.  The only international commodity group with higher indirect (embedded) GHG emissions come from the exploration, production and processing of oil and gas (including refining and petrochemicals).

There is a need for green markets targeting the supply chain of these carbon intense commodities. The Carbon Border Adjustment Mechanism (CBAM) is part of the European Union's (EU) Green Deal first announced in 2019. It represents a step in the EU’s commitment to reduce greenhouse gas (GHG) emissions under the Paris Agreement, a legally binding international treaty on climate change by the United Nations Framework Convention on Climate Change (UNFCCC).  Unlike domestic climate policies that put a price on direct GHG emissions in the EU, such as the EU Emission Trading System (ETS), the CBAM focuses on pricing the import of indirect or embedded emissions of commodities, including steel cement and fertilizers (e.g.., ammonium nitrate).

The CBAM represents a measure to protect the competitiveness of EU industries as they transition to a lower carbon economy. This includes preventing a shift in the production of energy intense commodities to countries with no carbon pricing – also known as carbon leakage. The CBAM does not set emission reduction targets. It aims at creating a level playing field in the cost of carbon abatement internationally. This is achieved by balancing the price paid for carbon emissions within the EU against the embedded carbon emissions in imported products not subject to carbon pricing.

The EU’s temporary solution was to provide EU producers with free ETS allowances until a more suitable solution to carbon leakage was implemented. A majority of EU legislators have voiced their support for a CBAM, which, would replace this temporary fix, and is compatible under the rules of the World Trade Organization (WTO) (Clough et al. 2021). However, this has faced pushback from industry lobbyists within the EU, that suggest delaying the CBAM roll as green commodity markets mature and suppliers can compete under the new policy. 

As it stands now, the CBAM will be implemented over a three-year transition period starting in 2023 when importers will be required to report embedded emission on a quarterly basis. This represents the number of CBAM credits they will be required to surrender. However, no price will be applied during the transition, giving the industry time to establish their reporting schemes and start lowering emissions through green investment initiatives.

Starting 2025 importers must register an official CBAM declarant and will be charged a penalty if quarterly CBAM reports are not sub mitted. The pilot is followed by an accelerated transition period in 2026 when all Articles of the CBAM are put into effect, with a price applied to CBAM credits in line with domestic carbon prices, and a phasing out of EU ETS allowances for domestic industries.

Measurement Reporting an Verification (MRV) of embedded emissions

Embedded emissions are defined as direct emissions during the production of goods from installations that a producer has direct control of (European Commission 2021a). The proposal explains that the CBAM applies to all direct GHG emissions of products before they are imported into the EU customs territory. However, the direct emissions of a producer that sends goods for export does not account for the embedded emissions of intermediate products, for example electricity and other inputs.

Annex III of the proposal describes the methods for calculating these emissions, defining products as simple or complex. The former involves only direct emissions while a complex good includes the embedded emissions of intermediate products.  Most goods covered by the CBAM, such as aluminum, steel, and basic fertilizers can be described complex.

Companies must register CBAM declarants that provide measurement, reporting and verification (MRV) processes for all direct GHG emissions upstream of a commodities supply chain. Depending on the interpretation or enforcement by the EU, this could include everything from the indirect emissions of electricity production, down to the embedded emissions during the production of upstream fuels, including coal, oil, and gas. Therefore, energy commodities are covered indirectly by the CABM as the primary intermediate products of complex goods.

The measurement and reporting should be organized by various foreign installations and passed on with sale of intermediate goods. Finally, verifiers accredited under EU regulations (Articles 8 and 18) will be faced with the challenge of interpreting embedded emission data sourced from, in many cases, multiple foreign jurisdictions. When producers are unable to provide verifiable data, default values will be applied to products from a particular country. This will rely on available data, literature estimates, or if none are available, the average emission intensity of the EU’s worst performing installations. To ensure their competitiveness, individual producers or countries that export to the EU will need to implement an MRV strategy to compete with EU producers.