The European Union has major decarbonisation goals – but in achieving these it is keenly aware of the need to protect its domestic industry. Enter the Carbon Border Adjustment Mechanism (CBAM).

This initially covers the import of certain goods into the EU, with the aim of determining – and taxing – the associated carbon emissions. The sectors in focus are iron, steel, cement, fertilisers, aluminium, electricity and hydrogen.

CBAM is currently in a transitional phase, which runs to 2025. During this period, companies must report embedded emissions. From 2026, CBAM will come into full force, as the EU Emissions Trading System (EU ETS) moves away from handing out free allowances.

To comply with CBAM, suppliers of manufactured goods to the EU will need to purchase EU ETS allowances, or reduce their own associated emissions.

*EC President Ursula von der Leyen visiting the Faroe Islands in March 2024.*

Start somewhere

Independent consultant and visiting research fellow at the Oxford Institute for Energy Studies (OIES) Raeid Jewad explained energy intensive industries would be progressively exposed to the EU ETS. “The CBAM is designed to prevent carbon leakage, which occurs when businesses move their production to countries with less stringent climate policies, thereby undermining the EU’s climate goals.”

Those importing goods into the union must declare the carbon content of their supplies. “This involves assessing the emissions produced during the manufacturing of the goods, and the required certificates will be based on this assessment.”

Jewad said EU regulations “significantly influence external CCS plans” through setting these emissions targets. They also create “financial incentives through mechanisms like the EU ETS. The ETS puts a price on carbon emissions, which motivates industries outside the EU to adopt CCS technologies to remain competitive in the European market.”

Block Energy is one company working on the task. It has a CCS opportunity in Georgia, where it operates oilfields. Following technical work to determine storage, CEO Paul Hayward said, the company started considering customers.

“Very quickly, we established relationships with three of the major carbon emitters in country, all of whom are staring down the pipe at CBAM legislation, because they export products into Europe. They’re thinking, we could have a problem here, how do we solve it? And off we went,” he said.

The tension for Europe is to find a path between reducing carbon emissions, while mitigating the impact on industry. The group is “at risk of a massive de-industrialisation … in the coming decade or so”, said Joop Hazenberg, EU director for the Carbon Capture & Storage Association (CCSA).

Project push

In the cases where carbon capture and storage (CCS) costs are lower than EU ETS prices, reducing one’s own CO2 will be the preferable option.

“It is important to have that market developed because it can actually create some kind of a business case for CCS. Right now, the business case for CCS is not lacking, but it’s insufficient because it’s just adding costs,” said Hazenberg.

The official recalled a conversation with a cement producer in the United Arab Emirates who was investing in CCS with an eye on future European market access.

“This is clearly a vision that is now slowly developing to go to a low-carbon product market. And then we need to create a framework around it. But it’s all just the beginning and CBAM will only be introduced very slowly.”

For those companies that lack access to CCS infrastructure, Jewad warned the EU regulations “may merely act as a production tax, without achieving substantial greenhouse gas reductions sustainably. Therefore, EU importers would be looking to avoid paying any financial adjustments through importation of low carbon products and therefore exporters into the EU need to ensure their products will be competitive in terms of low CO2 intensity.”

The consultant went on to note demand would also be driven by new corporate sustainability measures. These “require large companies to adopt and implement strategies aligned with the Paris Agreement”.

Focusing in on emissions

For projects to secure EU approval they must meet certain standards.

Suppliers must follow detailed monitoring, reporting, and verification (MRV) processes to ensure compliance with EU standards, Jewad said. They must also meet “technical and safety requirements for the transportation and storage of CO2”.

He described the MRV framework as “robust”, saying that it involved “regular inspections, audits, and detailed reporting by CCS operators. National authorities are responsible for enforcing these regulations and reporting to the European Commission.”

Hazenberg expressed some reservations about EU capacity to oversee CCS projects.

“There is not a huge team of policy experts working on CCS within the Commission. And most of the attention goes usually to renewables, to hydrogen. Those are the hot topics on the policy agenda. CCUS is more of an afterthought,” he said. There have been some signs of CCS taking on a more central role in the last year or two, he said.

Searching for standards

“It’s a bit of a cliche, but there’s a lack of regulatory framework in place. We lack the right standards for CO2 transport. And what’s the temperature? What is the pressure? What is the purity of the CO2 that needs to be stored? All of these things need to be still developed,” the CCSA director said.

The strategy is there but the market is as yet fragmented. “It’s really critical that the EU makes haste with, for instance, the CO2 transport regulation, which is in the pipeline.”

Hazenberg said the consultation on this was expected early in 2025, with the legislative framework to follow. “The next five years will be really critical for building a regulatory framework, which can then hopefully really unlock those investments that are needed.”

There is strong industrial interest in securing ways to enable exports of these goods from the UK, he continued. The government has made progress on bilateral agreements, primarily with northern European states.

Challenges

Bringing in CBAM is not without challenges, though. Some countries have expressed concerns that the EU’s move contravenes WTO rules. The Committee on Market Access recorded various complaints around CBAM in March this year.

Russia said CBAM aimed to protect the EU’s “domestic from fair foreign competition”. This, it said, “can hardly be justified by the WTO rules”. It noted CBAM would apply to products from countries that do not have an ETS linked to the EU’s system, or that do not apply a carbon price without rebates.

One concern brought up by a number of countries is around the principle of the different burden on developing, vs developed states. Paraguay, for instance, noted that it was a carbon sink. As such, it called for a mechanism to provide preferential access to EU markets.

Norton Rose Fulbright has reported concerns that CBAM could violate “most favoured nation” rules, if it differentiates between countries based on carbon. In particular, those countries with less ability to tackle emissions would need to pay a higher price at the border. The lawyers suggested that, at least at the moment, CBAM did not appear to contravene WTO rules. However, such issues would be determined on a case-by-case basis – leaving the door open for future cases.

Alignment

Hazenberg predicted the UK would find some way of growing closer to the EU’s system.

“We believe that with the change of government in the UK [and] also the new commission, which is going to be in place from November, that we really have an opportunity to, reset the relationship between the UK and also really promote Europe-wide CO2 markets.” Such a move could provide more competitiveness amongst storage sites, paving the way for cross-border transactions.

Integrating the EU and UK ETS would be a long process, he warned. “For Switzerland, it took them nine years. So aligning is a better word, maybe.”

Jewad said those countries with the existing industrial activity and strong trade relationships to the EU would be most likely to scale up CCS.

Agreements

The US and Canada are prime candidates, he said, alongside parts of Asia such as Japan and the Middle East. “These regions are motivated to implement CCS technologies to comply with EU market access requirements and benefit from potential financial incentives provided by EU regulations.”

Georgia-focused Block has taken inspiration from its access to storage and its proximity to emitters. CEO Hayward explained the company is working on a plan that would take carbon from Indorama, a local fertilizer company, and store it underground.

“It’s a fully integrated solution for capture, transport and storage. We’re looking at various models of monetisation, to satisfy the relevant regulators on the various exchanges, particularly EU ETS, which has a relationship with Georgia. That’s one of the obvious paths that we are exploring,” Hayward said. The company is considering carbon credits or some form of revenue sharing, targeting the export of green products into Europe.

“The cross-border relationships between Georgia and the EU are already broadly in place. They’re part of a free trade agreement … and there is already an agreement in place with EU ETS.”

Speed to market

An advantage of operating in Georgia, Hayward said, is the support from government. “The Georgian regulators are very practical, extremely pragmatic, and do not bog the industry down with regulation that’s not required,” he said.

The project would use existing infrastructure and Carbfix technology, which involves mineralisation. Hayward noted that once the technical work had been done, Block would carry out an injection test. This, he said, would take place within the next six months or so.

The plan could then scale up, he said. “Realistically, we’ll be looking at, a two to three year timeline to commercial injection. On a relative basis, this is fast. We’d like the project to handle at least 300,000 tpy of CO2.” The store could hold around 140 million tonnes, according to a study early this year.

Hayward said that, depending on tests of the mineralisation plan, Block could secure project approval relatively quickly.

The company could also take on additional supplies, potentially from Turkey. Block’s CEO noted Turkey was a significant manufacturer and “has a material carbon problem”. Block is talking to a Turkish petrochemical company, which has emissions of 1.5-2mn tpy.

The challenge, though, is of shipping CO2. Such a transportation plan hikes costs significantly, he said. For now, Block is looking at emitters in close proximity. He forecasts an “estimated cost to capture, transport and inject of around $13-14 per tonne. In the North Sea, those costs will be at least $60-70.”

Should Block’s calculations be correct, it could provide Indorama with crucial market access, bypassing the CBAM.

The speed of change is the challenge. As pressure from CBAM mounts, suppliers to the EU face tough questions. Pressure from these regulations will increase over time, as they come to apply to more industries and carbon prices rise. Given the time it takes to build a CCS project, manufacturers must take on this question now, in order to be ready for the future.

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