The European Union has proposed that the Carbon Border Adjustment Mechanism (CBAM) should in the future apply to indirect emissions of greenhouse gases arising from the generation of electricity used to produce the goods to which the regulation applies.

The CBAM, which will come into effect in its transitional phase on October 1, 2023, will only apply to direct emissions of greenhouse gases from the time of production of goods until the import of those goods into the EU.

According to the regulation, the inclusion of indirect emissions would further enhance the environmental effectiveness of the CBAM and its ambition to contribute to fighting climate change.

“Indirect emissions should, however, not be taken into account initially for the goods in respect of which financial measures apply in the Union that compensate for indirect emissions costs incurred from greenhouse gas emission costs passed on in electricity prices,” the regulation says.

During the transitional period, the carbon mechanism requires data to be collected to specify the methodology for calculating indirect emissions. The methodology should consider the quantity of electricity used for the specified production, the country of origin, the generation source, and the emission factors related to that electricity. The aim is to achieve the most appropriate way to prevent carbon leakage and ensure the environmental integrity of the CBAM.

The EU’s decision to go ahead with CBAM has sparked worries among countries exporting to Europe, with criticism that the carbon tariff measure is actually a protectionist tool in disguise.

India is planning to seek validation of its proposed carbon certificates and the exemption for some micro, medium, and small enterprises from CBAM. Indian officials discussed the CBAM issue with their EU counterparts in Brussels earlier this month.

In March, India presented a paper at the World Trade Organization on the increasing use of environmental measures as protectionist non-tariff barriers and said it was concerned about CBAM.

The CBAM’s ultimate objective is one of broad product coverage, although it would be prudent to start with a selected number of sectors with a carbon leakage risk. Initially, the following sectors have been identified: iron & steel, refineries, cement, aluminum, organic chemicals, fertilizers, and hydrogen.

While imports of hydrogen are low, the EU feels that the situation will change significantly in the coming years. For the decarbonization of the industry as a whole, it expects the demand for renewable hydrogen would increase.