The European Union should publish the methodology and values for default foreign carbon prices before 2027, according to the European Roundtable on Climate Change and Sustainable Transition (ERCST), which said the information is needed to assess an important element of the Carbon Border Adjustment Mechanism’s (CBAM) carbon-cost deduction system.
In a September 15 report, the Brussels-based think tank said companies need visibility on the monetary defaults to determine whether documenting actual carbon payments in exporting countries is economically worthwhile compared with relying on the default calculation.
The amended CBAM framework provides for annual default foreign carbon prices. ERCST said neither the values nor the methodology for calculating them had been published when its report was prepared.
Foreign carbon prices are separate from emissions factors
The monetary defaults should not be confused with electricity emissions factors. An emissions factor expresses carbon emissions per unit of electricity, while a default foreign carbon price is used to establish the recognised cost imposed on emissions in the exporting jurisdiction.
Neither figure represents the price of an EU CBAM certificate.
ERCST called for the default values to be calibrated so that the system neither creates an incentive for weak domestic carbon pricing nor makes companies less willing to obtain appropriate certification of carbon payments.
The calculation also needs to account for rebates and compensation, according to the report. The recognised deduction should correspond to the carbon cost actually borne by a producer rather than relying on a nominal tax or allowance price where the producer ultimately paid less.
Deduction uncertainty affects electricity trade costs
For cross-border electricity transactions, uncertainty over the carbon-cost deduction can persist even after the quantity of embedded emissions has been established.
A trader assessing a narrow cross-border margin therefore has to distinguish between uncertainty over the number of emissions tonnes and uncertainty over the value of the carbon payment that can be recognised against the EU border obligation.
Publishing the default foreign carbon-price values would address the uncertainty surrounding the fallback deduction. It would not determine an installation’s emissions, establish the validity of contractual evidence for an electricity delivery or eliminate differences between recognised domestic carbon costs and the EU CBAM obligation.
ERCST’s year-end request therefore concerns the practical availability of the carbon-cost deduction mechanism rather than the creation of a new exemption for electricity exporters.
