Decoding CBAM terminology: Embedded emissions & basic calculation methods

The focus of the Carbon Border Adjustment Mechanism (CBAM) lies in the concept of “embedded emissions.” Understanding this term fully and correctly is crucial for businesses to comply with the regulation. This article will provide a clear explanation on: (1) What are embedded emissions? What types of emissions are included in the product’s production process? (2) Distinguishing between direct emissions and indirect emissions within the CBAM framework: Direct emissions are emissions from sources owned or controlled by the producer (e.g., fuel combustion at the factory), while indirect emissions mainly relate to electricity consumption during production. (3) The scope of calculation: Currently, CBAM focuses on direct emissions and part of the indirect emissions from electricity use. This article will clarify this scope. (4) Basic calculation methods: Introducing methods recommended or allowed by the EU during the transition phase, including the use of actual activity data and emission factors. (5) The importance of data: Highlighting the role of accurate data collection on energy consumption, input materials, and production processes. Understanding how to calculate embedded emissions will help businesses not only report accurately but also identify emission “hotspots” in their processes, providing a foundation for improvements and future CBAM cost reduction strategies.

1. What Are Embedded Emissions? What Types of Emissions Are Included?

Embedded emissions, also known as “carbon embedded” emissions, refer to the greenhouse gas emissions that are released during the production and transportation of products. These emissions are embedded in the product itself, as they occur during the production phase before the product reaches its final market. This includes:

• Direct emissions: These are emissions generated within the manufacturing process, such as from fuel combustion in furnaces, boilers, or vehicles.

• Indirect emissions: These emissions are associated with the energy consumed during production, especially electricity and heat used in the process.

Understanding embedded emissions is essential for companies to assess the carbon footprint of their products and for the effective application of the CBAM.

2. Distinguishing Between Direct and Indirect Emissions in CBAM

Within the CBAM framework, emissions are categorized into two types:

• Direct emissions (Scope 1): These are emissions that come directly from sources owned or controlled by the producer. For example, emissions from the combustion of fossil fuels in the production process at a factory.

• Indirect emissions (Scope 2): These emissions primarily come from the electricity consumed during production. While businesses may not directly emit these emissions, they are a result of the energy consumed and thus must be accounted for in the CBAM calculations.

Currently, CBAM focuses on direct emissions and part of the indirect emissions related to electricity consumption.

3. The Scope of Calculation: What Does CBAM Cover?

At present, CBAM focuses on calculating:

• Direct emissions: These emissions are directly tied to the manufacturing process and are the primary focus in the current phase.

• Indirect emissions from electricity: Only emissions associated with electricity consumption in production are included under indirect emissions. Other forms of indirect emissions, such as from supply chain logistics, are not currently covered under the scope of CBAM.

Understanding the limitations of what CBAM covers is crucial for businesses to accurately calculate and report their embedded emissions.

4. Basic Calculation Methods: How to Calculate Embedded Emissions

The EU recommends or allows several methods for calculating embedded emissions during the transition phase of CBAM. These methods generally involve:

• Activity data: This refers to the actual data related to the energy consumption, raw materials, and production processes. For instance, businesses should track the amount of energy used in their production, including electricity, gas, and other forms of energy.

• Emission factors: These are coefficients that allow businesses to convert activity data (such as energy consumption) into an estimated amount of emissions. Emission factors are provided by recognized environmental authorities or industry standards.

It is essential for companies to use these recommended methods to calculate their emissions correctly and report them as required under CBAM.

5. The Importance of Accurate Data Collection

Accurate data collection is key to complying with CBAM. Businesses must gather precise information on several aspects:

• Energy consumption: Detailed tracking of the energy used during production, including electricity, natural gas, and other energy sources.

• Input materials: Data on raw materials and their carbon footprint during production.

• Production processes: Information about each step of the manufacturing process, including machinery used, fuel consumed, and any emission reduction efforts in place.

Accurate data allows businesses to correctly calculate their embedded emissions and ensure that their CBAM reports are both accurate and comprehensive. Furthermore, understanding where emissions are generated in the production process helps identify “hotspots”—areas where emissions can be reduced, offering opportunities for cost savings and emission reduction strategies.

Conclusion:

Understanding embedded emissions and how to calculate them is vital for businesses aiming to comply with the CBAM regulations. By distinguishing between direct and indirect emissions, and employing the correct calculation methods, companies can ensure their compliance and gain a deeper understanding of their carbon footprint. Early and accurate data collection will not only help businesses meet regulatory requirements but also identify opportunities to optimize their operations and reduce future CBAM costs.