The European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a significant regulatory shift aimed at reducing global greenhouse gas emissions. Among its many implications, CBAM has a crucial connection to Scope 3 emissions, which often represent the largest share of an organization’s carbon footprint. This article explores this correlation, addresses who is impacted, what Scope 3 emissions and CBAM entail, and why stakeholders should take proactive measures.
What are Scope 3 Emissions?
Scope 3 emissions are indirect greenhouse gas emissions resulting from a company’s value chain activities. These include:
- Upstream activities: Emissions from purchased goods and services, transportation (most transportation activities are NOT included in CBAM scope for now), and supplier activities.
- Downstream activities: Emissions from product use, disposal, and end-of-life treatment.
For many organizations, Scope 3 emissions constitute over 70% of their total carbon footprint, making them a critical area for achieving climate targets.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is an EU initiative to prevent carbon leakage—where companies relocate production to countries with less stringent emissions regulations. Starting in 2026, CBAM will impose tariffs on certain carbon-intensive goods imported into the EU, including steel, aluminum, cement, and fertilizers. A transitional reporting phase is already underway, requiring companies to report embedded emissions in their imports.
While CBAM does not directly mandate changes to how Scope 3 emissions are calculated or reported, its implementation indirectly influences their handling. Companies are increasingly pressured to enhance transparency, especially for upstream activities in Scope 3, to align with regulatory and market expectations. CBAM’s emphasis on carbon accountability also drives supplier engagement and prepares businesses for potential future expansions of regulations to include Scope 3 emissions.
CBAM primarily impacts:
- EU Importers: Companies importing carbon-intensive goods into the EU are directly subject to CBAM regulations.
- Global Exporters: Non-EU companies exporting regulated goods to the EU must calculate and disclose emissions data, including Scope 3 emissions.
- Supply Chains: Suppliers serving industries affected by CBAM will face increasing pressure to measure and reduce their emissions.
When is Action Required?
- 2025: Some aspects of Scope 3 emissions reporting become relevant for some organizations preparing for CBAM compliance.
- 2026-2027: CBAM enforcement begins, imposing financial penalties on non-compliant imports.
Organizations should act now to develop emissions tracking systems, collaborate with suppliers for emissions data, and align corporate strategies with EU regulatory timelines.
Where Should You Report Emissions Data?
EU importers must report emissions data through the CBAM registry. Detailed guidelines are available through the European Commission’s CBAM portal. Companies exporting to the EU should ensure data transparency across their supply chains, leveraging digital tools for streamlined reporting.
Why Should Companies Care?
The correlation between Scope 3 emissions and CBAM highlights the importance of robust carbon management across the value chain. CBAM emphasizes accountability for embedded emissions in imported goods, driving the need for companies to track and reduce their Scope 3 emissions. By proactively managing these emissions, companies can:
- Ensure Compliance: Tracking Scope 3 emissions helps businesses identify and address the carbon intensity of their supply chains, reducing risks of non-compliance with CBAM regulations.
- Streamline Reporting: Accurate Scope 3 data enables seamless reporting for CBAM requirements, ensuring transparency and reducing administrative burdens.
- Enhance Market Position: Companies demonstrating leadership in emissions reduction can attract sustainability-focused partners and customers, while mitigating potential penalties and regulatory risks associated with non-compliance.
Integrating Scope 3 emissions tracking into CBAM strategies is not only a regulatory necessity but also a competitive advantage in an increasingly carbon-conscious marketplace. Note that CBAM does not include all aspects of Scope 3 emissions so careful assessment and interpretation is necessary.
The Path Forward
The interplay between Scope 3 emissions and CBAM underscores the importance of robust carbon management strategies. Companies must prioritize emissions measurement, supplier engagement, and transparent reporting. Those who proactively adapt will not only mitigate risks but also thrive in an increasingly sustainability-driven market.
Need help further understanding the correlation between Scope 3 and CBAM? Contact us at [email protected]. With years of experience in regulatory reporting and a deep understanding of EU regulations, we can help you confidently streamline your compliance.