Carbon Border Adjustment Mechanism (CBAM)

What is CBAM?

CBAM (Carbon Border Adjustment Mechanism), known in Turkish as “Sınırda Karbon Düzenleme Mekanizması”, is a regulation developed by the European Union (EU) to support the EU's goal of achieving carbon neutrality by 2050 and aims to reduce the risk of carbon leakage. The carbon leakage that the EU wants to prevent can be described as a problem where tight carbon regulations in the EU lead producers to move their production processes to countries with less stringent environmental laws, potentially causing an increase in global emissions. To prevent this issue, CBAM imposes carbon taxation on imported products that are high-emission sources.

Objectives of CBAM

CBAM serves three main purposes:

1. Preventing Carbon Leakage:

The European Union has implemented carbon pricing mechanisms in line with its goals to reduce carbon emissions in the fight against climate change. However, some countries outside the EU have looser regulations on carbon emissions. This situation may disadvantage producers in the EU and lead them to shift their activities to countries with less strict regulations, resulting in an overall increase in carbon emissions instead of a decrease. CBAM aims to prevent carbon leakage by reducing this risk.

2. Protecting the EU Internal Market:

With the aim of reducing carbon emissions, the EU introduced the “Emissions Trading System” (ETS) in 2005. With this system, it became necessary for certain sectors subject to the system to pay a fee corresponding to their GHG emissions. However, as this system became more established within the EU, a lack of competition emerged between products produced within the EU, which are subject to emission pricing, and imported products that are not regulated. At this point, CBAM aims to reduce this lack of competitiveness between domestic and imported products in the EU with the carbon taxation system.

3. Promoting Global Climate Action:

CBAM aims not only to reduce carbon emissions within the EU but also to promote climate action globally. Countries exporting carbon-intensive products to the EU could be encouraged to develop their own carbon pricing policies and take steps to reduce their emissions to avoid the additional costs introduced by this mechanism.

How Does CBAM Work?

CBAM functions as a carbon pricing mechanism applied to specific product groups. In the initial phase, certain sectors with high carbon intensity will fall within the scope of CBAM. These include industries such as cement, steel, aluminum, fertilizers, and electricity. CBAM determines a price based on the carbon emissions generated during the production of these products.

Implementation Process

1. Determining Carbon Contents:

The embedded emissions of products to be imported into the EU under CBAM are calculated. Producers are required to report the carbon footprint of their products. These calculations are based on the energy sources used in the production processes of the products and production efficiency (fugitive gases and energy losses).

2. Carbon Pricing:

A carbon price is applied based on the embedded emissions of products imported into the EU. This price will be compatible with the prices applied to domestic producers in sectors where carbon pricing is implemented within the EU. For example, if a steel producer in the EU is subject to a specific carbon price per ton, steel imported from outside will also face a similar price.

3. Considering External Carbon Prices:

If there is already a carbon pricing mechanism in the importing country, CBAM takes this cost into account. In other words, if the producing country is already implementing a carbon price, this cost can be deducted from the carbon price to be paid in the EU. In this way, CBAM promotes global carbon pricing and tries to balance the cost of carbon emissions.

CBAM Transition Phase

CBAM, which came into effect on October 1, 2023, will be fully implemented in two phases.

• Transition Phase (2023-2025): Currently, firms are subject to this phase, which has been created for firms exporting products to the EU to adapt to the process and better comply with regulations. In this period, firms are expected to prepare CBAM reports quarterly and declare them to the EU. However, during this process, there are no financial obligations such as certificates or carbon taxes expected from these firms. In the current transition phase, CBAM calculations and reporting mostly reflect compliance with the process, but we can clearly say that its financial impacts have already started with the added value it provides to firms.

• Established System (After 2026): We can say that this part refers to the period when CBAM will be fully in force. By 2026, it is expected that products imported into the EU will have CBAM reporting and that the carbon emissions they generate will be paid for. Along with the end of the transition period, it is planned to include all products under the ETS carbon taxation system in the CBAM scope by 2030 through the compliance report to be prepared, and for the process to take its final form with the last compliance modifications.

CBAM Emission Calculations

Emissions within CBAM are divided into 2 scopes:

• Scope 1 Emissions:

  This scope refers to the direct carbon emissions during the production phase of the product. In other words, it shows the emissions from the natural gas used and other gases, as well as emissions arising from fugitive gases.

• Scope 2 Emissions:

  This scope describes the indirect emissions during the production phase. In this scope, electricity consumptions are examined. Emissions originating from the production phase of electricity that does not directly cause emissions are included in the carbon footprint of the produced product as indirect carbon emissions.

These calculations are done manually using Excel tables that utilize ready formulations available on the EU CBAM website. When making calculations, you find your consumptions as seen on invoices and then multiply by the emission factors. You can obtain these factors if your country provides emission factors for that resource, or from sources such as IPCC (United Nations) and DEFRA (United Kingdom). One of the particularly important issues to be mindful of here is that the units of the emission factors and the units of the collected data must be of the correct type. You can find detailed descriptions and data for the calculation section on the EU CBAM website.

CBAM Reporting

A CBAM report essentially requires the complete provision of information in 4 areas:

• Information regarding the exporting firm

• The quantity of the imported product in tons

• Embedded emissions of the product

• Electricity consumption in mW

Currently, CBAM report declarations are not mandatory for firms in our country, but will take place in the future via the EU's CBAM Portal. However, since importers within the EU are required to make this declaration, they can currently request CBAM reports from external exporters as well. It is important to keep CBAM reports ready in advance because importers without these reports will face severe penalties starting from January 1, 2026. Therefore, the mentioned importers will avoid importing products without a CBAM report.

CarbonSmart CBAM Module

In this period where even getting to metric data factors for emission calculations is a time-consuming process, CarbonSmart is there with its developed CBAM module. Thanks to our advanced algorithms and user-friendly interface, you can perform your calculations and subsequent reporting automatically through our platform without needing any special training. Let advanced AI-supported algorithms handle all these processes that require unnecessary time and manpower, such as processing thousands of rows of data within Excel, finding and tracking emission factors, performing uncertainty calculations, and reporting according to EU regulations.

Additionally, provide real-time data flow with our platform that integrates with ERP systems. This way, you can instantly calculate all your emissions and develop reduction strategies at the source with AI support. Using the same system, you can detect energy losses and anomalies that disrupt your production line through the platform, and through machine learning, you can reduce your energy consumption while also decreasing your production process costs through early detection of potential failures.

With CarbonSmart, you can comply with regulations while continuing your commercial activities, and efficiently manage the financial obligations created by carbon taxation, which will be fully implemented starting January 1, 2026. For more information, request a demo now.