The difference between CBAM and GHG Protocol

How does it work?

The EU has been making bold strides in its climate policy, and one of the most pivotal measures is the Carbon Border Adjustment Mechanism (CBAM) (Regulation (EU) 2023/956). Effective since 2023 in its transitional phase, CBAM is aligned with the EU Emissions Trading System (ETS) and imposes a carbon price on imported goods. This price reflects the greenhouse gases (GHGs) emitted during the production of these goods, known as embedded emissions.

The full implementation of CBAM is slated for 2026, at which point EU importers will need to purchase CBAM certificates. These certificates will mirror the carbon costs that would have applied had the goods been produced under stringent EU climate regulations. An important aspect of CBAM is its flexibility: if a non-EU producer has already paid a carbon price in their home country, this cost can be deducted from the CBAM charge, promoting fairness and encouraging global climate efforts.

To ease the transition, CBAM is being introduced in stages. From 2023 to 2025, importers are required to report embedded emissions but without any financial implications. Starting in 2026, the financial component kicks in, and importers will have to buy CBAM certificates. The mechanism currently targets sectors at high risk of carbon leakage, including:

• Iron/Steel
• Cement
• Fertilizers
• Aluminum
• Hydrogen
• Electricity

Key Definitions

CBAM classifies goods into two categories: Simple Goods and Complex Goods, as per REGULATION (EU) 2023/956 (Annex IV a & b):

• Simple Goods: Goods produced solely from input materials and fuels that have zero embedded emissions. • Complex Goods: Goods produced using input materials (precursors) that contribute to their embedded emissions.

Imported goods must report both direct and indirect emissions associated with their manufacturing processes:

• Direct Emissions: Emissions released directly from the production process, including those from the onsite generation of heating and cooling, regardless of where the heating and cooling were generated. • Indirect Emissions: Emissions resulting from the generation of electricity used in production processes, again irrespective of where the electricity is generated

The CBAM regulation (Regulation (EU) 2023/956), as outlined in Annex IV of Regulation (EU) 2023/956, define the methodologies for calculating embedded emissions. However, goods listed in Annex II—such as iron and steel, aluminum products, and specific chemicals like hydrogen—only require the calculation of direct emissions.

Additionally, Annex II of the Regulation identifies certain Combined Nomenclature (CN) codes beginning with 72 as exceptions, indicating that these items are excluded from the scope of CBAM ¹.

CBAM vs. GHG Protocol: Key Differences

CBAM differs from the GHG Protocol, a widely recognized standard for GHG accounting, in several key ways:

Emission Classification:

• Offsite Heating and Cooling: Under CBAM, these are classified as direct emissions, whereas the GHG Protocol categorizes them as Scope 2 (indirect).
• Onsite Electricity Generation: CBAM treats onsite electricity generation emissions as indirect if the electricity is sourced externally. The GHG Protocol, however, places these emissions under Scope 1 if the fuel is consumed onsite to produce electricity.

Here’s a breakdown of key emission sources and their classification under each framework:

Emission Source	CBAM	GHG Protocol
Facilities’ production-related emission	Direct Emission	Scope 1
Onsite produced heating and Cooling	Direct Emission	Scope 1
Offsite produced heating and Cooling	Direct Emission	Scope 2
Onsite produced electricity	Indirect Emission	Scope 1 (as fuel consumption)
Offsite produced electricity	Indirect Emission	Scope 2
Upstream activities (excluding purchased electricity, stream, heating and cooling for own use)	Precursor emission (Only emission from precursor production for complex goods included)	Scope 3
Downstream activities	Not in scope	Scope 3

GHG Covered by CBAM

• CBAM focuses mainly on carbon dioxide (CO₂) but extends to perfluorocarbons (PFCs) and nitrous oxide (N₂O) for specific sectors, determined by the product's CN code.
• The GHG Protocol provides a more comprehensive framework, covering a wider range of GHGs across three scopes:
  • Scope 1: Direct emissions from owned or controlled sources.
  • Scope 2: Indirect emissions from purchased electricity, steam, heating, and cooling.
  • Scope 3: All other indirect emissions, including those from the supply chain.

Issue and Sector	Cement	Fertilizers	Iron/Steel	Aluminum	Hydrogen	Electricity
Reporting metrics	(per) Tonne of good	(per) Tonne of good	(per) Tonne of good	(per) Tonne of good	(per) Tonne of good	(per) MWh
Greenhouse gases covered	Only CO2	CO2 (+ N2O for some fertilizer goods)*	only CO2	CO2 (+PFCs for some aluminium goods)**	only CO2	only CO2
Emission coverage during transitional period (2023-2025)	Direct and indirect	Direct and indirect	Direct and indirect	Direct and indirect	Direct and indirect	Only direct
Emission coverage during definitive period (from 2026)	Direct and indirect	Direct and indirect	Only direct***	Only direct***	Only direct***	Only direct

*Fertilizer: In the fertilizers sector, Carbon dioxide (CO2) and, only in case of nitric acid production, nitrous oxide (N2O) needs to be monitored as they are the primary greenhouse gases emitted during the production process. **Aluminum: For primary (electrolytic) smelting, both carbon dioxide (CO₂) and perfluorocarbons (CF₄ and C₂F₆) must be monitored. For secondary melting (recycling), only carbon dioxide (CO₂) requires monitoring. *** Subject to review after the transitional period

About the Authors

Minxing Si has over 15 years of experience in GHG reporting, quantification, and verification. He has worked extensively with various GHG reporting programs, including EU ETS, EPA MRR, California LCFS, ECCC CFR, Alberta TIER, and numerous provincial programs across Canada.

Tanusri Sarker specializes in carbon quantification and verification. With extensive global experience in implementing sustainability programs, she assists businesses in achieving regulatory compliance, accurate carbon accounting, and effective carbon reduction forecasting, driving impactful and sustainable business outcomes.

Footnotes

1. Guidance Document on CBAM Implementation ↩