The EU Carbon Border Adjustment Mechanism () started in a transition phase from October 2023. Even though the trial period lasts until the end of 2025, this controversial regulation is already setting in motion a domino effect that is spurring global climate action.

Solving a global problem

The EU considers climate change as a global problem and CBAM is a step towards reaching a global solution. Right from the start, CBAM generated strong responses from trading partners around the globe, especially . Reactions centered around of potential trade barriers and potential violation of World Trade Organization (WTO) rules. However, the EU maintains that the intention is for CBAM to strictly adhere to WTO rules. This pre-requisite is in fact behind much of the complexity of this new regulation.

Levelling the playing field as a correction to ETS

Keep in mind that CBAM is considered an to the ETS, and one of the goals is to provide EU producers with a level playing field. As such, several other countries that already have an ETS or initiative in place, are considering taking a similar approach.

The and are just two examples of countries with ETS schemes that indicated that they may follow suit and introduce their own border adjustment mechanisms, to ensure that their local producers also have a level playing field.

Establishing a climate club and comparability

From 2026 onwards, imported emissions in the EU will be subject to CBAM certificates. If it can be proven that an equivalent price was already paid outside the EU, that cost can be deducted. For the EU CBAM to remain aligned with World Trade Organization (WTO) rules, imported goods cannot be subject to higher duties than goods produced within Europe. Even if there is a carbon pricing initiative or an ETS in place in another country, that does not mean that it is fully aligned or ‘equivalent’ to the EU ETS. There could be differences between the sectors and coverage.

Consequently, the EU is establishing a with other countries, to enhance synergies and improve co-operation. This may lead to closer alignment between ETS schemes globally, similar to how the EU is aligning with and their schemes. Ultimately, over time, the goal could be to link markets.

Default values for countries vs actual data from site of origin

The transition phase provides a limited grace period for importers to collect data from their suppliers. In case there is no data available, default values can be used – but only until July 2024 and from then on only up to 20% for a product.

Although the default values are not yet included in CBAM acts, a will be used as the basis for these factors. Using the same methodology and actual data, the report shows that there are considerable differences between the impacted countries. For example, default product benchmarks for steel from countries like Russia, India and South Africa are trending higher.

The burden of proof to show that a product has a lower emission factor than the default, falls on the producers outside the EU. During the transition phase, there is no need for verification, but this will be required from 2026. The EU plans to work with local regulators in these countries to ensure that there are checks in place.

Raising climate ambitions to retain local revenues

Initially, default values or the supplier’s actual emission factors will only be used for reporting obligations, but from 2026 onwards importers will need to purchase CBAM certificates unless a carbon price was paid elsewhere. A country’s relative therefore depends not only on the annual export quantities and default product emission intensities, but also on local carbon pricing instruments that are already in place.

Hence, CBAM is causing political introspection in countries that are currently without an ETS or other forms of carbon pricing, to look at their own climate ambitions. Countries like the or are scrambling to see how they could retain some of the EUR 80 bn in from CBAM within their own jurisdictions.

Australia is an outlier compared to this, as CBAM affects only limited volumes of exports. An ETS was introduced in 2012, but it was by 2014 due a lack of bipartisan support. This was followed by a ‘baseline and credit’ type of scheme, while the most recent reforms of the started July 2023. Policy makers launched a to assess and address carbon leakage. This study will investigate various options, such as an Australian CBAM, mandating product standards and public co-investment.

Another example of an outlier is Mozambique, but again for different reasons. CBAM impact studies highlighted that smaller countries with a high percentage of trade reliance on the EU are the most in terms of barriers to comply and potential socio-economic fallout. To counter this, the EU will dedicate a portion of the revenue generated by CBAM to to climate efforts in developing countries.

From controversy to opportunity

In summary, EU CBAM seems to be having the intended global reach, causing a wide spectrum of responses. Countries that already have carbon pricing mechanisms, will likely follow the EU’s lead, and adopt their own CBAMs. Countries without carbon pricing or regulatory instruments, are starting to see benefit in retaining some of that revenue with their own regulations, rather than letting it flow to the EU.

The impacts of CBAM are playing out not only at country-level, but also on a corporate level. In the next blog, we will look at how the ripples caused by the world’s first CBAM will continue to play out, as the different types of impacted companies start to break down the complexity and assess the impact on their own operations.

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The EU Carbon Border Adjustment Mechanism () marks the start of a new era by entering a transitional period in October 2023. This regulation is the first of its kind, as it will require importers to buy certificates for emissions generated outside the EU. This new regulation is urgently needed as a correction to the existing EU Emissions Trading Scheme (), and it is designed to have a global impact.

Unintended Consequences

The ETS was also the first of its kind when introduced in 2005. It is still considered the EU’s flagship policy to combat climate change and the world’s largest carbon market. Although it successfully emissions by 41% in targeted sectors, it had some unintended consequences. With a reaching a record high of EUR 100, the EU ETS placed a staggering financial burden on local producers in 2022.

Consequently, the production of certain goods started to shift to countries with lower climate ambitions and lower, or no carbon prices. This phenomenon is called ‘’ and it defeated the original intension of the ETS to reduce emissions.

CBAM is therefore seen as a correction to the ETS, and its introduction will facilitate several linked objectives:

• providing EU producers with a level playing field
• incentivising suppliers globally to decarbonise
• meeting the EU’s ambitious ‘’ emissions reduction targets by 2030

To remain aligned with WTO rules, CBAM and ETS will be tightly coupled. The CBAM scope and coverage is expected to expand over time, but it must mirror the ETS to ensure that it does not impose a bigger burden on imports. If ETS expands to new sectors, it will also be fair game under CBAM.

In future, there could be other regulatory areas with overlap, for example is intrinsically linked to decarbonisation.

A Phased Rollout

CBAM will be implemented in phases, starting with a transition phase from October 2023 to the end of 2025. During this time, importers will have a quarterly reporting obligation, with the first report due on 31 January 2024. Reporting requirements focus on the quantity of the goods imported, and the calculated embedded greenhouse gas emissions.

The definitive period kicks in from January 2026, marking the start of the financial impact and the need for verification. With the introduction of mandatory CBAM certificates from this point onwards, a carbon price will be payable for imported emissions, aligned with what local EU producers pay under ETS. Double taxation can be avoided if it can be shown that an equivalent carbon price was paid outside the EU.

The gradual rollout of CBAM hinges on implementing acts and an overhaul of ETS in parallel. The phase out of ‘’ is a pre-requisite. These were introduced under ETS, to temporarily protect certain hard-to-abate sectors from carbon leakage. The goal is for the two regulations to be fully aligned by 2034.

CBAM Impacted Goods

During the transition phase, CBAM is limited to certain items made from iron, steel, aluminium, cement, fertilisers, hydrogen production, and electricity imported into the EU. It is important to note that it is not just the industries producing these commodities that are directly affected, but also downstream items that are made from it.

The impacted items are identifiable by the EU Combined Nomenclature codes (). Lists of impacted CN codes have been published for the transition phase, with two implementing acts already covering a raft of different products under the main sub-categories. The number of impacted items is expected to expand over time, with more finished goods and additional sectors, such as polymers and chemicals, to be covered next.

Embedded Emissions

CBAM departs from the GHG Protocol definitions for direct and indirect, or scope 1, 2 and 3 emissions. Instead, CBAM has its own definitions for ‘direct’ and ‘indirect’ emissions, focussing on what was emitted during selected steps of the production process, while remaining aligned with the ETS coverage.

Other new terms that CBAM introduce, is the concept of ‘simple’ and ‘complex’ goods. With complex goods, data is required from more than one installation or supplier upstream to calculate the embedded emissions. An example of complex goods would be cement made from clinker, where the latter is considered a ‘pre-cursor’ material. The same concept can be applied to other multi-step processes, all of which are described in detail for the transition phase.

Impacted Parties

Different types of businesses are impacted globally:

• Non-EU producers aka ‘Operators’ need to calculate their emissions intensity per production site, aka ‘Installation’ and share the product information with their local authorities and buyers.
• EU Importers aka ‘Declarants’ must request the information from their suppliers and declare imported emissions periodically. They will also be responsible for procuring CBAM certificates from 2026.
• Importers may appoint an indirect customs representative, who is then responsible for reporting as ‘Authorised Declarant’.

Some global businesses are both Operators and Declarants, and they typically have more complex intercompany and supplier relationships.

The introduction of CBAM is also expected to have indirect impacts, for example:

• EU manufacturers and consumers may experience price increases due to more expensive imports.
• Businesses subject to EU ETS will see a bigger financial impact over time, as free allowances are phased out from 2026 to 2032.

A Sense of Urgency

CBAM is an urgent matter for the EU as these sectors are critical to retain from a strategic perspective. Besides the ETS burden, producers are also facing increased energy costs due to the war in Ukraine. Another unexpected, and presumably unintended, blow came from an ally, with the US Inflation Reduction Fund (), which gives US investors long-term clarity and tax .

Together, these factors pose a real risk that EU businesses may shift their operations elsewhere. Hence, there is an urgency in the EU surrounding the implementation of CBAM. The timing is critical, as the impacted sectors have long investment cycles, and they need to embark now on projects to adopt lower emission technologies for the EU to reach their climate targets by 2030.

In summary, it is now clear that a local solution like an ETS cannot solve a global problem. That is why CBAM is designed to have a global reach and incentivise other countries to decarbonise. As a correction to ETS, CBAM is expected to set in motion a wave of regulations in other parts of the world. In the next blog, we will explore why the regulation is controversial and how other countries are responding.

For more information read: The Controversial Regulation with a Global Impact

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However, there is another looming risk to global financial systems that did not make the headlines. The risk of climate change is so critical that the US Treasury lists it as one of Ìýin their strategic four-year plan, alongside topics such as ensuring national security.

How Financial Stability Relates to ESG Disclosure

The impact of climate change is indeed considered a financial security risk globally, and there is a narrowing window for action. In the US alone, the total cost of climate-relatedÌýÌýsince 1980 exceeded USD 2,5 trillion. On the flipside, low carbon technologies present a tremendousÌýeconomic opportunity, and governments are scrambling to ensure an orderly transition. However, up to $100 trillion of assets revolving around fossil fuels isÌýÌýto be at risk, due to disruptive technologies and shifting government policies.

Environmental, social and governance (ESG) disclosure on a corporate level is a critical component of effective risk management. That is why regulators around the globe are implementing new rules requiring companies to disclose sustainability risks, in line with existing requirements for other risks.

Shifting Towards International Standards

A big shift is needed, before investors will be able to compare companies using not just finance, but also sustainability criteria. In June 2023, the first twoÌýÌýwere released by the International Sustainability Standards Board’s (ISSB). It means that Sustainability data must be reported with the same scrutiny as Finance data. ÌýThe standards build on existing frameworks such as SASB (Sustainability Accounting Standards Board), GRI (Global Reporting Initiative), and the Task Force on Climate-related Financial Disclosures (TCFD).

Both the EU and US indicated that they would align with ISSB. Several other countries also indicated that they may adopt these standards, includingÌý,Ìý, and the UK.

Controversy Surrounding New Regulations

The US Securities and Exchange Commission () proposed a controversial new regulation in 2022. It will require publicly traded companies to disclose how their operations affect the environment. It is encouraging firms to disclose more detailed information about their climate strategies, to increase transparency.

°Õ³ó±ðÌýÌýprovides a structured frame of reference and a common understanding of economic activities that contributes to environmental goals, such as climate change mitigation or circular economy objectives. It is linked to the EU’s revisedÌýÌýunder the Corporate Social Responsibility Disclosure (CSRD), effective from 2023.

The EU is currently leading the way with the concept ofÌý. This means considering both the impact of the outside world on a company, as well as a company’s impact on the outside world. It is rooted in the view that the world beyond finance can be material, and therefore worth disclosing.

What it Means for Australia & New Zealand

Maintaining investor confidence is crucial for smaller countries and Australia & New Zealand are not isolated from global economic stability trends. New Zealand passed a world first regulation in 2021, with reporting requirements from 2023. Their new Climate-related Disclosure () requires listed companies, insurers, banks and investment managers to report on how they will be affected by climate change.

Sustainability-related disclosures is also a hot topic Downunder, with Australia’s Securities and Investment Commission (ASIC) urging businesses toÌý. Voluntary disclosure using TCFD is recommended, and mandatory disclosure will likely be aligned with the international standards from ISSB.

The Outlook for Business Leaders

Regulators need to protect investors from greenwashing and create financial security to facilitate an orderly transition, while shifting investments to where they are most needed. We can expect to see continued expansion and refinement of regulatory reporting requirements over time. Companies who do not act on addressing current and future environmental concerns, could face challenges to get access capital or suffer reputational damage.

Digital reporting practices and assurances are stipulated from the outset in some of the new regulations. The biggest obstacles are data availability, quality, and fulfilling new levels of audit scrutiny. More granular and meaningful data is needed at critical points in operations to make decisions and steer a business towards KPI targets.

Some of the new rules also mandate reporting on scope 3 emissions, which is beyond the boundaries of a single corporation. Voluntary standards are currently lacking, as it uses estimates. A significant shift is expected in this area, with groundwork being done by the World Business Council for Sustainable Development (WBCSD)Ìý.

On How to Get Started

Leaders are acutely aware of the need for scalable technology solutions. They ask two essential questions: ‘How can we leverage what we already have’ and ‘how can we keep up with change’?Ìý By leveraging sustainability solutions that are fully embedded into ERP solutions, like SAP, additional workloads are minimized. Not only does this produce audit-ready data, but it also allows data-driven, fact-based decisions.

To find out more, visit sap.comÌý

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Steelmaking contributes 8% of the world’s greenhouse gas emissions, which means shifting consumer behaviour could be significant. Unfortunately, there are no sustainability labels for frying pans yet, not to mention more complex products like phones, or cars. However, the world is currently in a race of monumental proportions to bring exactly this type of information to the consumer’s fingertips.

This article explores the impact of this shift, as producers race to capture the market for sustainable products. It considers the implications of geopolitics, the significance of regulations and government incentives that are shaping the rules for product-related declarations. It also looks at the practical implications, of what businesses can do today to prepare for this shift.

Ìý

The Chicken and Egg Problem

To make any claims about products, requires benchmarking and industry averages for comparison. ÌýIt also requires clear standards and methods for data collection and calculation, with common reference points, so all stakeholders can make informed decisions. Transparency is needed beyond the operations of the producer of the final product, as every entity in the chain needs to contribute.

The question is where to start, from the final product and work backwards, or at the beginning of the chain? The is a prime example that is driven from the end of the chain. The request for data is passed from the car makers to tier 1 suppliers, and so on, until it reaches the start of the chain. Eventually, regardless of if it is a frying pan or a car, the requests end up with the primary producers. This means that mining and metals represent the key to unlocking a future where consumers can make more sustainable product choices.

All the Eggs in One Basket?

Unlike eggs, minerals are not evenly distributed across the globe. Think of it as raisins sticking out of a fruit loaf. There are more raisins inside, but only a few are visible and accessible on the surface. ÌýWhen it comes to natural resources, only a small number of countries are at the heart of several critical global supply chains. The mining and metals industries are therefore currently facing a rising trend of resource nationalism, as countries seek to secure their access to critical resources and promote domestic production.

In addition, the processing of ore historically shifted to regions with emerging economies as companies tried to lower operating costs. These regions may not have strict regulations in place, or there could be issues with data availability and transparency. Significant investment, international co-operation, and potential adjustments to trade is needed to steer towards greater transparency.

Making Omelettes Means Breaking Eggs

Organic eggs have consumers’ trust now, but it required a grassroots transformation of the industry. ÌýThat trust must still be earned for more complex products. Whether it is a car or a frying pan, it will be an iron marathon. This much is clear from the recent report from the International Energy Agency on

Governments do want to channel private and public spending towards meaningful and sustainable change, but it requires a fine balance to protect consumers along the way. Initiatives range from preventing greenwashing to new regulatory instruments to enforce change. Examples include:

1. Tightening of consumer labels and standardisation of product-related claims:
   • The US and the EU’s for consumer products
   • The EU’s
2. Providing incentives to change:
   • Public green procurement initiatives in the &
   • The US Inflation Reduction Act () and the EU’s
3. Enforcing change and protecting interests with changing geopolitical dynamics:
   • The EU’s regulation requires importers to disclose the embedded emissions
   • The EU aims to ensure continued access to critical raw materials
4. Standardising data collection, calculation methods and reporting:
   • The emissions intensity of products needs to be declared, per US and EU
   • Targets must follow sector-specific guidelines, such as the

The Goose that Lays the Golden Eggs

Business leaders are looking to capitalize on this emerging market. Their customers are demanding it. But there are several barriers when attempting to calculate product-related greenhouse gas emissions. Firstly, gathering data throughout the supply chain is challenging. Inconsistent methodologies and data quality further complicate the process. Finally, cost constraints may hinder businesses from investing in robust measurement and verification systems.

The good news is thatÌýbusinesses can already take steps today, and start making progress by using digital solutions. Find out how 51·çÁ÷can support businesses with Transforming Carbon Accounting Systems and specifically, how they support Steel producers to decarbonise.

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