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Nicolas Endress is the CEO and founder of ClimEase, a Swiss software company that provides a platform designed to help companies comply with the EU’s Carbon Cap Adjustment Mechanism..
Earlier this year, the EU’s Carbon Cap Adjustment Mechanism (CBAM) began imposing additional tariffs on imports of carbon-intensive products, from aluminum and steel to cement and fertilizers.
Large industrial producers based in the European Union are paying a carbon price European Union Emissions Trading System (EU ETS), European carbon marketfor almost two decades. CBAM – the world’s first carbon border tariff – extends this carbon cost to goods entering the bloc from abroad.
The logic behind the mechanism is that since EU manufacturers have paid for the carbon emissions produced when they produced goods using the EU ETS, all other nations making the same goods should do the same.
However, as companies begin to prepare for the cost of CBAM, many are finding that the biggest savings today will not necessarily come from switching to cleaner production. Instead, the default emissions values come from replacing emissions data verified using EU-approved methodologies and independent verification.
Moving from default values can significantly reduce exposure to carbon tariffs, even if verified emissions are not particularly low.
This may disadvantage relatively efficient producers who do not have access to accredited auditors. If the ability of exporters to secure verified data is unevenly distributed, the system risks perpetuating inequalities.
Default values inflate the exposure
CBAM requires all EU importers to report their “embedded” carbon dioxide equivalent (CO2e) emissions, i.e. their total greenhouse gas emissions, associated with imported goods.
They then need to calculate the true cost of carbon based on the supplier’s product-specific emissions data. If such product-specific emissions data are not available, importers should apply the default emission values set by the European Commission.
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To assess emissions, manufacturers determine the total amount of fuel used during the manufacturing process and other direct inputs, such as fuel for production in a steel mill.
These inputs are then converted into tonnes of CO2 using methodologies approved by the EU. The results are verified by an independent expert certified according to EU standards. This verification process can be expensive and often difficult to achieve developing countries.
CBAM also requires the inclusion of emissions of key precursor materials. This means that emissions from upstream suppliers must also be calculated and verified. If not, importers must apply default values to these entries.
As these upstream processes can account for up to 80% of a product’s footprint, companies can still have significant exposure to default values even after checking emissions from their direct suppliers.
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These default values are generally very high and often represent the maximum possible emissions of the most polluting facilities in a given country or region. A highly efficient steel plant in India, Brazil or Turkey, for example, would be assessed as if it were the least efficient plant in that region, due to the lack of formally verified emissions data that meet EU standards.
Equity at stake
There are equity issues here too. Developing economy suppliers that have actually reduced emissions will likely not see a reduction in CBAM costs unless their improvements are officially recognized by the EU.
However, obtaining third-party verifications requires time, expertise and financial resources, which can pose practical challenges for some suppliers, especially those with complex supply chains that require multi-stage verification.
EU importers will have to apply default values in the absence of verified data, and carbon costs will be significantly higher even if the manufacturing process is relatively efficient.
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To address this imbalance, the EU could focus on expanding access to verified verification, especially in developing markets, by providing clearer guidance and standardized frameworks for reporting emissions in supply chains.
Improved recognition of credible local verification schemes and investment in digital reporting infrastructure would help reduce reliance on conservative default values.
Without these adjustments, there is a risk that CBAMs reward those who are best equipped to navigate verification requirements, rather than those who achieve the lowest emissions in practice.
In this new trading environment, efficiency data – not just low emissions – will determine which producers gain an advantage.
