INSIGHT: CBAM reporting begins, fertilizer exporters to EU challenged to account for carbon

LONDON (ICIS)–The transitional phase of the EU’s Carbon Border Adjustment Mechanism (CBAM) came into operation on the first of this month and with it the need for official carbon reporting that will impact importers of ammonia and related fertilizers.

• Importers expected to calculate and log embedded carbon
• Quarterly reporting at first
• More exacting reporting conditions after transitional phase

These fertilizers sit alongside other goods, such as cement and steel, and also electricity, the importers of which are expected to account for carbon in a quarterly CBAM report lodged on a dedicated CBAM website.

Importers have been made aware of the reporting requirements for some time but the calculations they use to track embedded carbon will be tested over the introductory phases of the CBAM.

In a preliminary reporting period, a “transitional phase” according to the EU, there is some flexibility in requirements and methodologies used to calculate embedded carbon.

And until the end of 2024 there is a choice when it comes to reporting on a quarterly basis: either in full according to a new methodology published by the EU; reporting using three optional equivalent methods; or reporting on default reference values – but the last option is only available until July 2024.

There are further complexities and relief that importers have needed to become aware of as different phases of the reporting period come into effect.

As far as fertilizers are concerned, CBAM embedded carbon reporting includes some Scope 2 and Scope 3 emissions related to production facilities as well as direct Scope 1 CO2 emissions within the facilities themselves.

The phasing in of the CBAM will allow for a “predictable and proportionate” transition for EU and non-EU businesses, the EU says in its CBAM guidance.

“During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. Indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilizers), on the basis of a defined methodology outlined in the Implementing Regulation published on 17 August 2023 and its accompanying guidance,” it adds.

ICIS has reported regularly on the progress of the CBAM and its impact on the cost of carbon under the EU’s Emissions Trading System.

This analysis indicates that during the transitional period, failure to report the embedded emissions of imported goods will result in €10-50 fines per unreported tonne of CO2. The EU is not expected to impose fines for mis-reporting through the transitional period, however, but is likely to come down hard on those that make no effort to report through the scheme.

After the transitional phase, grace periods for reporting carbon are much reduced and fines increase.

Importers of ammonia and related fertilizers – including urea, mixed fertilizers and nitric acid – will need to get up to speed with CBAM reporting quickly and webinars are available to help those involved in the value chains as well alongside online support.

The EU says the mechanism is a “landmark tool”. It adds: “By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined.”

The source of ammonia imports to Europe has changed dramatically following Russia’s invasion of Ukraine and the onset of Europe’s energy crisis suggesting that a broader number of players might be expected to register within the CBAM.

Source: ICIS

Ammonia and related fertilizer production costs have eased though the European summer but some plants have been offline for an extended period,
their owners preferring to import material rather than produce in the region.

The development of the CBAM and its relationship to the ETS and the cost of carbon to EU producers will need to be closely watched as the CBAM process becomes embedded.

Carbon cost in the EU is expected to rise sharply as the number of free allocations under the system are withdrawn and the full cost of climate change abatement begins to bite.

The CBAM is seen as a driving force for change as producers of the commodities that fall under the scheme better understand its implications and, possibly, greater efforts are made to decarbonise outside of the EU.

A shorter-term impact is likely on trade flows and on costs

Insight by Nigel Davis