Content Overview

Chapter Page
Introduction 3
EU ETS Cap-and-Trade: Phasing Out Free Emission Allowances 4
Carbon Leakage: A Threat to EU Climate Efforts 5
Equitable Carbon Pricing: The Carbon Border Adjustment Mechanism (CBAM) 6
Quarterly Submission & Initial Report Due by January 31, 2024 7
CBAM - A Multidisciplinary Approach 8
Leveling International Trade: CBAM Certificate Costs 9
Sustainable Procurement: Accounting for CBAM 10
Authorized CBAM Declarants & Reporting Methodologies 11
Start Now, Save Later 12
CBAM Software Deep Dive: carbmee EIS™ 12
Summary 14
Authors 15
The increase in global greenhouse gas (GHG) emissions poses a
significant threat to people and the planet, leading to climate
change and its destructive consequences. As a major contributor
to GHG emissions, Europe plays a pivotal role in addressing the
global climate crisis. In response, the European Union (EU) has
introduced the “Fit for 55” package, a comprehensive set of
proposals to revise EU legislation and adopt new initiatives
designed to cut EU emissions by at least 55% compared to 1990
levels by 2030. Central to this set of proposals is the concept of
carbon pricing, a mechanism assigning a monetary value or price
tag to carbon emissions. By attaching a tangible cost to
emissions, carbon pricing serves as a powerful incentive,
encouraging the decarbonization of industries and the adoption of
cleaner, more sustainable practices.
EU ETS Cap-and-Trade: Phasing Out Free
Emission Allowances
A cornerstone of the aforementioned carbon pricing efforts is the European
Union Emission Trading System (EU ETS). The EU ETS follows a cap-and-trade
model, which limits the total amount of emissions in power generation and
energy-intensive industries (e.g., cement, iron, aluminum, paper
manufacturing, aviation, etc.). Low carbon prices resulting from high caps and
free allocation of emission certificates have led to the mechanism being
considered rather ineffective in the past. However, recent reforms have led to
significant increases in certificate prices. Under the ‘Fit for 55 -package, the
EU is now tightening the cap-and-trade system by further increasing the linear
reduction factor for certificates (by 4.3 % from 2024 to 2027 and 4.4 % from
2028 to 2030) as well as phasing out the allocation of free emission
allowances by 2034. In addition, several EU countries have introduced national
carbon taxes, many of which focus on sectors not covered by the EU ETS.
However, the amount of tax per ton of CO2e emissions, as well as the share of
GHG emissions covered by the tax, vary strongly between the countries.  

By international standards, the mechanisms outlined above result in EU

companies being subject to comparatively high carbon taxes. As a result,
energy-intensive industries like steel, cement, and chemicals, are expected to
experience increased production costs. This could diminish international
competitiveness and potentially lead to a trade disparity, as products become
more expensive compared to those from countries with less stringent or
missing carbon pricing systems. 

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Carbon Leakage: A Threat to EU Climate Efforts
The EU faces the risk of businesses relocating production to countries with
laxer carbon regulations due to higher EU carbon prices, potentially
undermining domestic climate efforts. This phenomenon, known as carbon
leakage, not only hampers EU emission reduction goals but also raises
concerns about economic fairness. Shifting production outside the EU merely
transfers emissions from one location to another, without reducing global
emissions.

Furthermore, carbon leakage has adverse economic consequences on

regions implementing stringent carbon policies, since they bear the cost of
emission reductions. Domestic firms offshoring their production to avoid
carbon taxes can result in job losses, decreased GDP, global resource
misallocation, and overall market welfare loss. Conversely, regions with
weaker regulations benefit from relocated economic activities, often without
taking equivalent steps to reduce emissions.

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Equitable Carbon Pricing: The Carbon Border
Adjustment Mechanism (CBAM)
To address the environmental and trade-related concerns linked to the risk of
carbon leakage, the EU adopted the Carbon Border Adjustment Mechanism
(CBAM). Its fundamental purpose is to establish fair conditions for
international trade by ensuring equivalent carbon pricing on imported and
domestically produced goods. This means importers of affected goods must
obtain CBAM certificates corresponding to the related direct and indirect
emissions. Initially, the mechanism targets sectors with significant GHG
emissions, a high trade intensity, and a considerable risk of carbon leakage. In
practice, these are Cement, Electricity, Fertilizers, Iron and Steel, Aluminum,
and Hydrogen. The scope of goods is expected to expand in the upcoming
years, with discussions focusing on the inclusion of polymers (plastics),
various chemicals, mineral oil products, paper, clay, and glass products.
Ultimately, the EU aims to subject all goods affected by the EU ETS to CBAM.

Third country market EU Market

Importer CBAM Certificates

Production of goods
in affected sectors
Production of
ETS emission
goods in affected
certificates
sectors

Own illustration based on Umweltbundesamt

The policy serves various goals, including safeguarding the competitiveness

of EU industries, mitigating the pervasive threat of carbon leakage, and
strengthening climate action by encouraging non-EU nations to adopt more
ambitious climate measures. In essence, CBAM aspires to level the global
playing field for carbon pricing and environmental responsibility. To account
for the complexities of global production chains and prevent instances of
double taxation, CBAM incorporates a mechanism permitting non-EU
producers to offset previously paid carbon costs against the expense of
CBAM certificates.
Quarterly Submission & Initial Report Due by January 31, 2024
CBAM will be phased in gradually, starting with a transitional period from
October 01, 2023, to December 31, 2025. During this period, CBAM declarants
must capture and report direct and indirect GHG emissions related to the
production of goods imported into the EU. Companies must submit quarterly
reports within one month after each reporting period’s end, with the first
report due by January 31, 2024.

Reports must include the total quantity of each type of imported good, total
embedded emissions, total indirect emissions, and the carbon price in the
country of origin for the embedded emissions. Starting from January 2025,
only the EU method will be permissible. No certificates need to be purchased
during the transition phase.

The full implementation (definitive period) of CBAM starts in January 2026.

Henceforth, CBAM certificates must be purchased from authorized CBAM
declarants. Certificate costs will increase gradually in the following years. It is
expected that by 2034, CBAM certificates will cover 100% of embedded
emissions for the affected goods and the cost burden will be fully
implemented. Simultaneously, there will be no more free allocation under the
EU ETS for these goods.

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CBAM - A Multidisciplinary Approach
Managing CBAM within a company is a multidisciplinary effort impacting
various company functions. Historically, carbon pricing measures such as the
EU ETS were managed by operational or manufacturing business units, due to
the availability of necessary data (e.g., at the production asset level). However,
CBAM regulations include, on the one hand, the determination of CO2
emissions that fall under the sustainability function, and, on the other hand,
compliance with customs regulations. 

Customs declarants are responsible for CBAM procedures, with reporting

requiring data input from the customs, materials management, and supply
chain functions, necessitating integration with purchasing, warehousing, and
customs processes. Often, the customs or the legal department ensures
compliance with the CBAM regulations, and the finance or purchasing
department assesses financial implications and allocates resources for
adaptation. Overall strategic management decisions must also be aligned
with new requirements and financial implications.

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Leveling International Trade: CBAM Certificate Costs
The primary objective of CBAM is to level the playing field in international
trade by imposing the same carbon price on imported goods as those
produced under the EU ETS. Consequently, the price of CBAM certificates will
be determined weekly, based on the average EU ETS closing prices on the
common auction platform.

If goods are imported from a country with a comparable carbon pricing

mechanism, the non-EU scheme’s price will be deducted from the CBAM
certificate cost. To compensate for the gradually decreasing free allocation of
EU ETS certificates until 2034, the CBAM obligation will increase from 2.5 % in
2026 to 100 % in 2034.

The surrendering obligation is calculated as follows:

Surrendering obligation = Embedded emissions – Reduction for

carbon price paid abroad – Adjustment to reflect free allocation
within the EU

The costs for European corporations importing non-EU goods covered by

CBAM will therefore inevitably increase. Besides certificate prices, companies
will face a higher administrative burden related to tracking and reporting the
carbon footprint of imported goods. This may require investments in
monitoring, measurement, and reporting systems. Especially for companies
with complex supply chains outside the EU, a substantial rise in cost burden is
to be expected, potentially impacting the company’s overall competitiveness.

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Sustainable Procurement: Accounting for CBAM
CBAM will necessitate affected companies both within and outside the EU to
reassess strategic decisions across their supply chains and adjust their cost
calculations. This presents a challenge for the procurement function,
potentially affecting sourcing decisions in several ways.

One option for impacted companies to diminish their reliance on imports from
non-EU countries is to shift toward suppliers within the EU, countries with
established carbon pricing mechanisms or particularly low emissions that can
be evidenced. This can reduce exposure to CBAM and, consequently, lower
the costs associated with purchasing importing allowances.

The economic lever of CBAM is the incentive to seek out more carbon-
efficient suppliers as importing products from such suppliers would require
fewer CBAM certificates. Companies might also work to persuade their
suppliers to adopt emission reduction measures. This approach would not
only help mitigate the potential impact of CBAM but also aid them in meeting
their own carbon reduction targets. In essence, CBAM is expected to drive
substantial investments in low-carbon technologies and energy efficiency,
thereby fostering a trend toward green procurement and accelerating the
overall transformation of many industries toward sustainability. Given the rise
of carbon pricing both under EU-ETS as well as CBAM, investments into
decarbonization shall pay off.

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Authorized CBAM Declarants & Reporting Methodologies
Importers bear the responsibility of collecting, calculating, and reporting the
relevant carbon emissions data. The import of impacted goods and the
acquisition of certificates can only be carried out by authorized CBAM
declarants from 2026. In order to be able to fulfill the reporting requirements,
the importers need to push down the data requirements to their suppliers. The
determination of the data must be done by the non-EU operators of
installations manufacturing goods subject to the CBAM regulation.

With regard to the implementation regulation, until the end of 2024, declarants
will have three distinct options for reporting embedded emissions of 

affected imports. These options are:

Full reporting in line with the new EU method

Reporting following an equivalent method (third-party methodology) –

Permitted until December 31, 2024

Use of default reference values published by the European Commission

for reporting - Permitted until July 31, 2024

The EU will publish default values for emission reporting by the end of 2023.
Starting from January 2025, only the EU method will be permitted for the
determination of the embedded emissions. Under this approach, estimates,
including EU default values, are permissible solely for complex goods and
must not exceed 20% of the total embedded emissions. It is important to note
that there are significant differences between the EU calculation methodology
and other widely used methods like the GHG Protocol in determining
emissions.

The CBAM calculation method is closely aligned with the one used as a basis
for the EU ETS. However, it differentiates due to the requirement of a product-
type based emission determination. According to the regulation, during the
transition period, reporting declarants are not yet obligated to validate their
CBAM reports through an independent verifier. eporting declarants are
R

permitted to make changes to submitted CBAM reports for up to two months

after submission, and modifications for the first two reporting periods can be
made until the deadline for the third-period report submission.

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Start Now, Save Later
With the EU Commission mandating quarterly reporting since October 2023
for materials in the categories of Cement, Iron, Steel, Aluminum, Fertilizers,
Electricity, and Hydrogen, affected companies should prepare for CBAM
sooner rather than later. The expected CBAM-related price increase for
imported goods depends on various factors and can differ significantly
between the different types of products, origins, production method, use of
input materials and so on. Forecasts of carbmee and EY suggest that the
purchasing cost increase for imported products subject to CBAM can easily
over-compensate current common profit levels, i.e., CBAM can have
significant economic effect. It is thus imperative for companies to prepare for
the transition phase towards full implementation. Sourcing and supply chain
decisions should be strategic, focusing on long-term time horizons. Delaying
action might result in low-emission materials being committed to long-term
contracts by other companies, leaving the laggards to purchase products
requiring costly CBAM certificates.

Early preparation is essential for two primary reasons: firstly, to ensure

compliance with regulatory requirements, and secondly, to facilitate the
necessary adjustments in sourcing and the supply chain. Failing to prepare in
advance may not only result in penalties but also in significant financial
disadvantages in the sourcing process.

CBAM Software Deep Dive: carbmee EIS™

Companies affected by CBAM typically operate complex supply chains
consisting of a large supplier base and transaction volumes, making it
particularly challenging to calculate carbon emissions. Traditionally, such
businesses made rough estimations using spend-based methods, assessing
emissions of specific categories based on order volumes and estimated
emission factors.

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Through carbmee, companies can determine the emissions of each
transaction or order at a granular level, following an activity-based approach.
As part of this methodology, accurate emission values are determined based
on parameters like the weight of a transaction. This method relies on
parameters like transaction weight, distinguishing between two data types -
activity-based on secondary data and activity-based on primary data from
suppliers -, the latter being the most precise level. Hybrid models, combining
spend- and activity-based data, are commonly used due to varying data
availability within organizations. For instance, a company may possess spend
data for certain transactions, while activity-based data is available for
transactions from other suppliers within the same organization. carbmee
operates as an adaptable system that can accommodate varying levels of
maturity uniformly. The platform stores and displays the corresponding
calculation methodology for each individual transaction, offering additional
features to advance data maturity (e.g. collecting primary data from suppliers
via the supplier collaboration feature).

This journey toward decarbonization, focusing on supplier-specific data, holds

significant importance within the framework of CBAM regulations. As per the
EU legal text, EU default values can be utilized for the first two quarters (Q1 &
Q2 2024). However, starting from mid-2024, companies will be mandated to
provide supplier-specific data, i.e. primary data from suppliers, in their reports.
This necessitates a swift determination of the supplier-specific carbon
footprint for all transactions involving CBAM goods.

Carbmee provides robust support through its supplier collaboration feature,

allowing direct collection of necessary data points via CBAM-specific
workflows. The platform provides real-time visibility into the data collection
status and guides users through the collection process, enabling precise
emission calculations within regulatory boundaries. As a result, all essential
data can be downloaded in the provided format within the platform. The
collected primary data can be integrated into the calculation of product
carbon footprints. Supplier-specific primary data enhances the precision of
the bill of materials, resulting in a more accurate calculation of product carbon
footprints overall.

In summary, CBAM mandates transactional carbon management within

Scope 3. Given the complex nature of supply chains and the associated Scope
3 challenges, the use of supporting software such as carbmee EIS™ enables
companies to effectively navigate the intricacies of CBAM regulations.

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This guide delves into the transformative impact of the Carbon
Border Adjustment Mechanism (CBAM) on businesses,
highlighting its significance in the context of global carbon pricing
efforts. As part of the EU's "Fit for 55" package, CBAM serves as a
crucial tool to level the playing field in international trade, aligning
carbon pricing across borders and encouraging sustainable
practices. Early preparation is essential for businesses navigating
the complexities of CBAM, safeguarding them against the
repercussions of inaction, including penalties and 

financial setbacks.

Collaboratively, carbmee and EY equip businesses with the

resources needed to prepare for the challenges and opportunities
arising from CBAM. carbmee delivers a comprehensive platform
designed to efficiently manage CBAM complexities within supply
chains, ensuring compliance with regulatory requirements. EY
offers invaluable strategic support, guiding businesses through
the intricate aspects of CBAM across various departments. By
leveraging these integrated solutions, companies can secure
compliance, enhance competitiveness, and foster sustainability in
the era of mandatory carbon pricing.

Authors
Reinhard Frigger
Partner
Supply Chain & Operations EY
Pia Moschall
Consultant
Supply Chain & Operations EY
Alina Biermann
Head of Decarbonization
carbmee
About EY
With a wide range of experts working across
the areas of consulting, law, strategy, and tax,
EY is the ideal partner to support clients in
adapting their business strategy and
practices to changes in the market and
deliver value to their clients. 

(LCA), and supply chain emissions (scope 3)
Organizations are currently faced with
constantly increasing requirements in the
field of sustainability due to recent
regulations and customer demands. These
requirements can be addressed effectively
only with an approach that encompasses the
entire supply chain. Our experienced supply
chain practice can support you in developing
and efficiently managing transparent and
sustainable supply chains to build trust with
customers, investors, stakeholders, and
regulatory bodies.
Dr. Lukas Benz
Senior Consultant
Supply Chain & Operations EY
Florian Renneberg
Climate Strategist
carbmee
About carbmee
carbmee EIS™ enables organizations to
seamlessly collect, analyze, and report
emissions data across all three scopes of the
Greenhouse Gas (GHG) Protocol. It combines
carbon accounting, product carbon footprints
into a single integrated system to centralize
complex data streams. By facilitating data
accuracy and transparency, carbmee
empowers enterprises to make informed
decisions and implement effective emission
reduction measures. For more information,
please visit carbmee.com. 
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Unlock CBAM compliance with carbmee EIS™.

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