Living with CBAM!

The European Union has reached a provisional agreement on its slowly emergent emissions legislation, which aims to reduce carbon emissions from its domestic industries. To protect these industries from higher carbon regimes elsewhere and/or to inhibit EU industries from moving to such regimes, the EU Commission has also proposed a Carbon Border Adjustment Mechanism (CBAM) to be applicable to goods being imported to the EU.

Companies that wish to import to the EU therefore need to find a way of demonstrating compliance with these slowly emerging regulations. This article is written to help such companies……

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Background

On 1 October 2023, the European Union’s Carbon Border Adjustment Mechanism (CBAM) entered into application in its Transitional Phase.

The European Commission have outlined that the EU CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage, with the following sectors as initially within scope during the transitional phase of the EU CBAM:

  • iron and steel
  • aluminium
  • cement
  • fertilisers
  • electricity
  • hydrogen

With respect to two obvious ‘missing’ sectors ie oil & gas and agriculture (food stuffs), our suggestion would be Watch this Space!

EU Co2 Free, CBAM

As an importer, your EU customers were to begin reporting greenhouse gas emissions on your exports in scope of the EU CBAM on a quarterly basis from 1st October 2023. The EU importer (or ‘reporting declarant’) must provide a ‘CBAM report’ on a quarterly basis, to the European Commission via the CBAM Transitional Registry, by the end of the month following the end of the quarter. EU importers may ask you for information to help them calculate the embedded emissions of the products you export to them.

From 2026, the Definitive period of the CBAM will apply. That means from 1 January 2026 onwards, EU importers will have to bear a “CBAM obligation” in the form of certificates, which they purchase at the average price of EU Emissions Trading System allowances (metric is tCO2e/t)*, for every CBAM good imported into the EU. There will be a phase-in with increasing coverage of embedded emissions by the CBAM obligation from 2026. The full embedded emissions will only be covered from 2034 onwards.

*oil and gas imports may be treated differently, more on that in a while…

What this means in practice

First of all, the emissions that need reporting are those embedded all along an importer’s supply chain. For example, if you are sending a fertiliser which is based on ammonia to the EU, and that ammonia is produced from natural gas, then the relevant embedded emissions will be those all the way from the field production of the gas, through its processing and transportation, Haber Processing, the power used in each stage etc……

Secondly, the EU says it will pay great attention to the veracity/credibility of reported emissions which means they will (eventually) need to be measured not estimated. And there will be penalties for non-compliance……

Thirdly, this will require sophisticated digital carbon accounting not just Excel spreadsheets.

Fourthly, let’s think specifically about gas imports to the EU.

This is a very interesting analysis by CSIS of the current status of the EU’s thinking on regulating methane emissions and how it might impact LNG exporters

My first thought was “Jeez, there’s a long way to go!” but I moved on from that……

Let’s jump to a potential end point in a few years time in which the EU has fixed on Methane Intensity as a performance standard, to be at or below 0.2%, with a fee being imposed on noncompliant suppliers, and even a threat to close market access to emissions-intensive gas suppliers.

0.2% is the OGCI’s invention from a few years ago, here are some of their words:

“The methane intensity target introduced a standardized methodology, measuring the volume of methane emissions from member companies’ upstream oil and gas operations as a percentage of the volume of the total gas marketed. The 0.2% target it set is now frequently referenced as the industry standard to strive for.”

[Note that an equivalent standard is under discussion for the methane emissions related to marketed oil]

A key word in this is ‘volume’ (the OGCI members variously use cubic ft, cubic meters, kilograms) – the important point it is these that will need independent Measurement, Verification and Reporting (MRV).

This presents a rather different problem to using a service deploying sensors to help a company rank its fugitive emissions (and then undertake LDAR), or agreeing that it has demanding internal guidance about venting (and flaring), thus allowing/enabling verified Sustainability Reports etc.

It requires ‘whole asset’ measurements – probably on a repetitive basis – and I’m going to stick my neck out here and say that as of today I’m only aware of two (2) sensors that truly measure, in cubic feet, cubic meters or kilograms) – to an accuracy of say +/- 10%.

And this MRV has to be undertaken by an independent entity……..

CO2 and CO4 emissions
Compliance/Mitigation

Compliance with CBAM means, in our opinion, accurately reporting measured emissions that are being reduced year-on-year, via various mitigations, to a level where they are lower than any threshold the EU sets.

This is a daunting task but exporting companies have time given the progressive rollout of CBAM described above. 

CO2 and CH4 are the two most important emissions to address.

For CO2, the single most important mitigation technology is Carbon Capture & Storage (CCS) which is why there is a major focus on it for the UK’s Industrial ‘Clusters’ where many of the industries mentioned above are clustered together; and why proposals for new gas-fired power stations include CCS.

For CH4, apart from dealing with fugitive emissions by LDAR, solutions come under the heading of gas-to-power at different scales to monetize and/or mitigate methane that is otherwise being vented or flared; for a single producing facility this could involve generating electrical power for the site, scaling up to a semi-regional project that feeds power into the grid or combusting the methane so only emitting CO2.

Future Energy Partners provide expert service for the full upstream value chain and asset management, offering consultancy that aligns with the latest regulations and policy. In addition to a general introduction to CBAM, we can assist you with:

  • digital technology to aid carbon accounting
  • measuring methane emissions and flaring
  • gas-to-power solutions
  • carbon capture and storage assessments.

Our comprehensive expertise in the energy sector allows us to support your projects from concept to completion. To find out how we can help you navigate the evolving energy landscape and achieve your sustainability goals, contact us today.

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