What is embedded emission, and how to calculate it?

As reported before, the carbon tax system has been launched in October 2023, and the deadline of 31 January 2024 for the first quarter data provision is approaching rapidly. Considering the complexity of the regulation, it is worth starting to prepare for it, because we can already see that the data provision will be followed by a complicated and lengthy process. The most complex part of the data provision is undoubtedly the determination of embedded emission on imported goods, so this topic will be our main focus in the first article of our series.

The mandatory content of data provision within the framework of the Carbon Border Adjustment Mechanism is specified in the EU legislation on the transitional period of the CBAM. In addition to the obligation to provide detailed data on the non-EU facilities producing imported goods and their operators, the most important and complex task is nonetheless the determination of the embedded emission of imported goods. In relation to this, EU legislation set out several definitions for emission. For each good and precursor, which emission shall be taken into account in the course of data provision must be examined separately.

First, it may be necessary to define what should be considered emission but, considering the regulatory logic of the CBAM, this question can be easily answered. With respect to this, we would like to refer to our summer newsletter, which clearly explains that, according to the CBAM Regulation, emission is the amount of greenhouse gas that is released into the atmosphere during production of the goods subject to the mechanism. The legislation also determines the emission of which greenhouse gas shall be taken into account for the calculation within each category of goods. Unsurprisingly, in most cases this will be carbon dioxide, but it is important to note that the legislation may set out other types of gas for certain products. For example, in the case of aluminium products, perfluorocarbons shall also be taken into account, while, for certain fertilizers, emission data for nitrous oxide shall be calculated as well.

In general, we can say that direct emission occurring in the course of production shall be determined in each case. Direct emission shall include all types of emission that occur in the course of the production of goods, including emission occurring during production of the necessary heating and cooling capacity. While there are several methods for calculating direct emission, when choosing a method, it is important to take into account the physical specificities of the goods, the production value chain, the applied production technologies and the precursors used in the production process.

Another important element of the emission calculations is the indirect emission, which practically means the emission occurring in the course of producing the electricity used for production. It is important to note, however, that it is not necessary to determine indirect emission for all CBAM goods; in exceptional cases defined in the legislation, this emission element may be disregarded.

In addition to the above emission definitions, CBAM also recognises the term ‘actual emission’. Actual emission is a different dimension from the above, and it must be interpreted within the framework of the emission methodology. The actual emission is basically a primary emission value which is determined by the operators in a frequency and quantity set out by the CBAM legislation and which differs from the dictated default values, the application of which is allowed separately by the legislation.

Considering the fast-paced introduction of the CBAM system, we believe that it is very important for the operators to use the available options for exemption and simplification to the greatest extent possible in the first periods of data provision in order to keep the deadlines. This way, they can buy time, and can more easily prepare for the progressively stringent rules.