Executive Summary:

With the Carbon Border Adjustment Mechanism (CBAM) set to fully enter into force in 2026, the exclusion of indirect emissions across all CBAM sectors poses risks for the instrument’s climate credibility. The European Commission is mandated to assess whether the CBAM’s scope should be extended to cover these emissions. With this paper Bellona aims to address the issue and put forward concrete, feasible and legally sound solutions to ensure a swift inclusion of indirect emissions across all CBAM sectors without harming EU competitiveness or exposing European industry to carbon leakage. 

This paper examines two major obstacles currently preventing the integration of indirect emissions into the CBAM: existing carbon leakage measures under the EU Emissions Trading System (EU ETS) and the methodology used to calculate indirect emissions. 

First, the Indirect Cost Compensation (ICC) system is fundamentally flawed: by compensating emitting and fossil electricity, it weakens decarbonisation incentives, lacks transparency and consistency across Member States, and blocks the inclusion of indirect emissions across sectors. Reform is therefore essential: ICC should only compensate for the spillover carbon costs embedded in non-emitting electricity, while ensuring fossil-based power remains fully exposed to the ETS carbon price. 

 Second, the CBAM’s current methodology for calculating indirect emissions is not fit for purpose. Of the default options considered, only national grid averages meet the Commission’s criteria of preventing carbon leakage and safeguarding environmental integrity. At the same time, vague requirements for Power Purchase Agreements (PPAs) create loopholes that could threaten fair competition and climate ambition. A robust methodology should therefore use country grid averages as the standard, while permitting actual values only where importers can demonstrate lower emissions. This should happen only through renewables direct connections or PPAs meeting strict requirements on additionality temporal and geographical correlation as in the Renewable Fuels of Non-Biological Origin (RFNBOs) Delegated Act. 

Addressing these two shortcomings as outlined in this paper would unlock CBAM’s full potential, enabling it to function as the effective carbon leakage measure it was designed to be. A CBAM that covers indirect emissions across all sector with a strong methodology will not only protect European companies from the risk of carbon leakage, but also incentivise producers in third countries to transition to renewable energy, thereby delivering global climate benefits in line with CBAM’s underlying rationale.