What is the Carbon Border Adjustment Mechanism?

The CBAM is an import tax on products that have a high carbon footprint. This tax will be based on the amount of greenhouse gases emitted during the manufacturing process of the product. The CBAM will enter into force in its transitional phase as of 1 October 2023 and will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage. While importers will be asked to collect fourth quarter data as of 1 October 2023, their first report will only have to be submitted by the end of January 2024. Once the permanent system enters into force on 1 January 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. 

What does it address?

The CBAM will cover industries such as steel, cement, and aluminium. This new policy is a way for the EU to ensure that companies importing goods into the EU are held accountable for their carbon emissions, just like companies within the EU are. The CBAM will also be a way for the EU to prevent carbon leakage. This is a situation where companies move their production to countries with less strict climate policies to avoid paying for carbon emissions. By introducing the CBAM, the cost of importing goods with a high carbon footprint will increase, making it less attractive for companies to move their production to countries with fewer climate regulations.

Why is Carbon Accounting Important for Firms in Preparing for the CBAM?

Carbon accounting is the process of measuring and reporting greenhouse gas emissions. The Greenhouse Gas (GHG) Protocol can be used as a guide for this process, which is designed to help companies identify areas where they can reduce their carbon footprint. 

Carbon accounting breaks down emission types into the following categories:

• Scope 1 Emissions: Emissions from activities a company directly controls. Example: Emissions from company-owned vehicles.
• Scope 2 Emissions: Emissions from purchased energy. Example: Emissions from purchased electricity.
• Scope 3 Emissions: Emissions from sources beyond a company’s direct operations and purchased energy. Examples: Emissions from supply chain activities, product transportation, employee commuting, and waste generation.

Carbon accounting is important for firms because it allows them to:

• Scope 1: Measure and track their direct greenhouse gas emissions, such as those from on-site fuel combustion and industrial processes.
• Scope 2: Measure and track their indirect greenhouse gas emissions associated with purchased electricity, heat, or steam.
• Scope 3: Measure and track their indirect greenhouse gas emissions throughout their value chain, including emissions from suppliers, transportation, use of products, and disposal.

By accounting for all three scopes, firms can gain a comprehensive understanding of their carbon emissions, including those associated with their supply chain processes, energy consumption, and overall operations.

How Carbon Accounting can Help Firms Prepare for the CBAM

Firms can utilize the Greenhouse Gas Protocol to prepare for the CBAM by:

• Scope 1: Identifying and quantifying their direct greenhouse gas emissions from their facilities and operations. This will help firms understand their own carbon footprint and take steps to reduce emissions within their control. 
• Scope 2: Evaluating the greenhouse gas emissions associated with their purchased electricity, heat, or steam. This will allow firms to assess the carbon intensity of their energy sources and explore opportunities to switch to low-carbon alternatives. 
• Scope 3: Analyzing and managing the indirect greenhouse gas emissions embedded in their value chain. Firms can identify the carbon emissions associated with their suppliers, transportation, and use and disposal of their products. By calculating the carbon footprint of their entire value chain, firms can pinpoint areas for emissions reduction, optimize their supply chain, and potentially reduce the impact of the CBAM on their imports.

Expertise in carbon accounting is poised to become increasingly important in the coming years. Generally speaking, engineers are usually entrusted with the accounting procedure. As such, greentech.training has prepared a detailed Insight Seminar to train engineers specifically in the essential skills required to navigate the intricacies of carbon accounting via a two day program. This can be followed by a deeper assessment of a company’s output upon request. Further guidance on the implementation of CBAM for importers of goods into the EU can be found here.