The Carbon Border Adjustment Mechanism (CBAM)
11 min
Level
In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
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Greenly’s answer to SBTi’s Scope 3 public consultation
Level
In the context of insufficient climate actions and a growing interest for corporate scope 3 targets, the Science Based target initiative (SBTi) launched a set of proposals to improve its current target setting framework. Greenly took the time to analyze their recommendations and answer their public consultation questions.
The Science-Based Targets initiative (SBTi) has considered several key options to enhance scope 3 target-setting for aligning corporate value chains with global climate goals. Here is a summary of the main options:
Summary of SBTi’s proposals
1. Change current requirements for boundaries
Currently, companies are mandated to reduce either 67% of their scope 3 emissions (near term target) or 90% of their emissions (long term target). SBTi discussed the possibility of changing their perimeter of targets.
- Align near-term target boundaries (67% of scope 3 emissions) with net-zero requirements (90% of scope 3 emissions).
- Allow companies to select a minimum of the two most relevant scope 3 categories as their reduction perimeter.
- Assess a company's influence to focus on areas where they can drive the most change. Emissions sources where influence is minimal could potentially be excluded from the target boundary, or SBTi could require companies to handle emissions differently (requiring companies to address emissions they can influence directly through interventions such as policies and targets while addressing others through mechanisms like collective action or policy engagement for instance).
- Focus on the most emissions-intensive activities.
- Address activities in sectors that significantly contribute to global GHG emissions.
- Prioritize activities that, if left unaddressed, could lead to long-term high-emission infrastructure.
2. Diversify target types
SBTi is looking to incorporate new metrics to assess the alignment of procurement and revenue activities with global climate goals. A prime example of these diversified metrics are current supplier alignment targets as opposed to emissions reduction targets. However these could include other outcome-based metrics to provide a clearer picture of progress and alignment. For instance, companies could be expected to report on and increase the share of their clients that are SBTi-aligned, or to report on the share of their revenue that is generated by low carbon products.
3. Certification and Environmental Attribute Certificates
The SBTi framework wants to explore how certification systems and environmental attribute certificates (EACs) can support credible value chain mitigation claims. This includes scenarios where commodity certificates and carbon credits substantiate the low-carbon characteristics of a product, upstream emissions reductions or carbon avoidance and capture; and where certificates are traded or passed down supply chains.
Greenly’s answers
Section 1: A more comprehensive set of tools
1. The paper introduces the concept of “alignment targets” that assess the alignment of a company’s upstream and downstream activities with global climate goals. Which approach to introducing alignment targets do you think would be most effective?
- Both alignment and emission reduction targets are required for near and long-term targets
According to SBTi’s definition, alignment targets incentivize an increased share of procurement, finances or product sold that demonstrate emissions performance compatible with achieving net-zero emissions by 2050.
First and foremost, there’s no denying that alignment targets significantly contribute to diffusing emission reduction across value chains. In particular, we appreciate the novel idea of downstream alignment targets that should incentivize companies to raise awareness on the climate content of their products to their customers. Climate action needs to be global to be effective.
Second, we want to emphasize alignment targets have the potential to put forward companies whose efforts are currently left unrecognized. If the alignment is at least partially based on a taxonomy that identifies current Paris-compatible low carbon alternatives to answer otherwise carbonated needs, companies that haven’t started decarbonizing their activities but contribute to building a low carbon society (eg, collective transportation provider) will be finally be identified as sustainable business partners as part of the SBTi framework. (Note that these businesses shouldn’t be exempt from emission reduction targets; and this strong point doesn’t apply for a method based on abatement benchmarks). Further, companies whose baseline is already emission efficient could also be identified as sustainable partners even if they haven’t put reduction actions in place since their baseline.
However, we believe that only requiring alignment targets is insufficient to drive climate action.
In particular, our experience is that procurement alignment targets are not sufficient to secure Paris compatible levels of value chain decarbonation. We expect supply chain depth, emission distribution across actors and the capacity of companies to influence their supplier significantly affects reduced emissions; and are currently researching the topic.
Further, as underlined by SBTi, the capacity of firms to meet alignment targets is deeply tied with their capacity to influence their suppliers or their demand. While it is worth exploring in this direction, it seems likely that this is out of range for most SMEs that still collectively represent 13% of CO2 emissions (Olarewaju, Dani, and Jabbar (2023)).
Lastly, we believe alignment targets might slow down emission mitigation if associated certifications are unreliable. If corporations manage to get a certification without effectively reducing their corporate or product level emissions, it is likely, given the current corporate resources for emission management, other supply chain actors will rely blindly on this certification. A science-based, conservative method and regular audits are thus essential to challenge the status quo.
3. At what level of granularity should the SBTi assess the alignment of value chain activities with global climate goals:
- Both at the overarching revenue and procurement-level (Option 1) with sub-targets at the activity level (Option 2)
We believe both the company and activity level should be scrutinized by SBTi or corporations to assess alignment of corporations with climate goals.
Corporate level assessments are essential from a risk perspective. Corporations that depend on carbon emissions for large pans of their revenue have high transition risks. While they might offer a sustainable business line, their business model is not resilient, and they shouldn’t be considered a reliable partner.
On the other end, activity or product level assessments are essential to limit the influence of price and market variations when it comes to corporate sustainability assessment. Indeed, our experience shows revenue and revenue distribution can vary significantly year-on-year, especially for SMEs and high growth companies. A global assessment could thus be unstable year-on-year.
Further, even if a product is negligible as part of the companies business model, it doesn’t mean associated emissions are negligible globally. For instance, Amazon’s cloud activities do not represent the core of their business model, yet cloud based emissions are a growing cause of concern and should be addressed.
Lastly, product-level assessments allow for more precision when integrating assessment results in GHG accounting. In our opinion, it is inevitable that companies take into account such assessments to predict their future emissions. Having only a company level assessment would result in gross emissions miss estimates if the supplier’s reduction strategy is focused on other product lines.
4. Which of the following options for assessing alignment do you think is most effective if a company identifies a value chain activity in a high-climate-impact sector (e.g. steel production) in its direct business relationships (e.g. tier one supplier)?
- At both the entity level and emissions source level
5. Which of the following options for assessing alignment do you think is most effective if a company identifies a value chain activity in a high-climate-impact sector (e.g. steel production) beyond its direct business relationships (e.g. beyond tier one supplier)?
- At both the entity level and emissions source level
We recommend companies assess their suppliers both at the entity and emissions source level, regardless of the supplier’s tiering.
Total entity emissions are a first step and allow following the companies’ global reduction efforts (including rebound effects across sources). We acknowledge that in the absence of further resources and given the usually high number of suppliers to assess, most companies won’t be able to go further than this analysis during their first assessment years.
Yet, assessing suppliers at emission source levels can help identify emissions hotspots and mitigate low-hanging fruits. If companies can influence their suppliers, they might suggest action plans to them. The quality of action plan recommendations will raise with an assessment per emission source.
Further, in a world where carbon emissions are often partially accounted for, having visibility on scope 3 exclusions is necessary to determine whether reported emissions are comparable. We recognize that corporate emissions benchmarking is still young and full of pitfalls, but expect it to become more common with the latest reporting directives (CSRD) and the uptake in voluntary disclosures (CDP).
Lastly, we want to underline that assessing suppliers at emissions source levels is essential to build supplier specific emissions factors as only scope 1 & 2 and upstream scope 3 emissions need to be taken into account, which is already a common practice.
6. Please indicate (with links) any tools or resources that may be useful for establishing alignment at the activity level that SBTi should investigate. For example, commodity certificates, climate taxonomies, etc.
IEA
IPCC
European Union Taxonomy for Sustainable Activities
World Bank summary of existing taxonomies
Section 2: A more nuanced approach to target-setting boundaries
7. Should the SBTi continue requiring companies to set scope 3 targets only if their scope 3 emissions constitute 40% or more of their total scope 1, 2 and 3 emissions?
- No
We view the 40% threshold as arbitrary, and emissions representing less than 40% of a corporate footprint still should be included in corporate reduction strategies. This threshold limits the diffusion of GHG reduction targets among secondary or primary companies. Additionally, under the current uncertainty of climate reporting, 40% of emissions can quickly become more significant in the following years due to methodology or perimeter adjustments. We recommend systematically requiring scope 3 targets.
8. At what level of granularity should the SBTi require companies to breakdown their scope 3 emissions in order to enable effective identification of relevant emissions sources for target setting?
- Where categories are identified as high magnitude (i.e. constitute a large volume of emissions), for example the top 2 or 3 categories, break these down at the specific activity, commodity, product or service level using a predefined significance threshold.
In our experience, increased granularity leads to better management and follow-up on action plans. Yet, we understand there’s a trade-off between accuracy and speed of action : companies shouldn’t be required to spend years collecting information before being able to enter the SBTi framework. We thus recommend only the most relevant categories be broken down.
10. Which approach to determining the target boundary for near-term targets do you agree with most?
Align near-term boundary with net-zero target boundary requirements (90%), supplemented by climate-relevant emissions sources if necessary.
We believe limiting the target perimeter for near term targets is not advantageous for companies. Indeed, from our perspective, wider targets have further chance to include cost-efficient mitigation options, even in less relevant emissions sources. We find it's the accumulation of these efficient options that often paves the way for successful short term emission reduction.
Further, forcing companies to fully acknowledge their emissions from the start of their reduction strategy is essential to avoid balancing effects where emissions reductions in the perimeter results in emission growth outside the perimeter (this can occur, for instance, if waste handling emissions are excluded).
Lastly, anticipation is key when it comes to emissions reductions. We would thus argue that companies should consider the full picture of the emissions they need to abate from the start, even if they deprioritize certain options in the near term.
We welcome the introduction of the notion of climate-relevant emissions sources that shed light on absolute emissions levels, high climate impact sectors and risk of emissions lock-in. While in the preliminary stages of discussion, we believe these notions have the potential counter current limitations of the framework (no precise anticipation of predictable emission evolution post-baseline & no taking into account of the absolute emission value of the baseline to adjust targets).
12. Can you provide any proposals for how the SBTi might integrate influence into the framework, other than those presented within the paper?
First and foremost, we want to underline that we are opposed to using influence metrics to define emissions target perimeters. In our experience, companies already abuse the concept of influence to try to minimize their GHG reduction efforts, claiming for instance their emissions are fully dependent on the choice of their clients, that there are no alternative suppliers available, or that the implementation of reduction actions would result in bankruptcy. While this might be in some cases legitimate, we fear that in the absence of a clear definition of influence, of defined influence thresholds, and of a verification process, this will limit climate ambition. Moreover, we want to emphasize that such qualitative elements often profit the biggest corporations that have public relation teams ready to support their claims.
However, we suggest integrating influence considerations to adapt procurement alignment objectives to corporate reality. We think it’s unrealistic to expect medium-sized companies that represent a fraction of their suppliers revenues to convince them to undergo a sustainability assessment, let alone put resources into reducing their emissions. We suggest forbidding the use of supplier engagement targets in such cases.
13.a. In the context of Scenario 1: Use of commodity certificates from value chain activities, what additional considerations should the SBTi take into account when further examining this scenario?
We suggest keeping the following in mind:
- Rebound effects. Producing or buying low carbon/ energy efficient commodities often results in rebound effects at the company emissions levels. We encourage SBTi to set safeguards to prevent this.
- Materiality challenges. If the standard is criteria based, the materiality of the criteria considered and omitted should be carefully studied and disclosed to make sure companies grasp the relative importance of competing certificates for a commodity.
- Double counting. We anticipate situations where certificates for carbon friendly practices will be claimed both companies that have put the carbon friendly practices in place and companies that bought and transformed the commodities. We suggest allowing the issuing of such certificates for companies that transformed their operations.
- Adverse externalities. Average adverse externalities on other environmental and social impacts should be mentioned along with the certificate.
- Availability of supporting evidence. We would recommend tying the certificates to supporting evidence from third parties (eg third party audit, bills, charts, etc).
- Compatibility with GHG reporting. To facilitate GHG reporting and audits, certificates should directly correspond to emission factor options.
13.b. In the context of Scenario 2: Use of commodity certificates from sources with lower or no value chain traceability, what additional considerations should the SBTi take into account when further examining this scenario?
In addition to the following information above, we suggest remaining mindful of the following:
- Economic outcome. Such mechanisms have been challenged by the scientific literature. It is unclear whether such mechanisms actually lead to the emergence of a green premium or encourage status quo. We recommend carefully monitoring the market.
- Emission outcome. Similarly, such mechanisms have been criticized for their lack of environmental impact. For instance, the capacity of the CEE mechanism to generate additional emission efficiency has been called into question.
- Penalties for infringement and verification. In line with our previous remarks, we call for conservative rules and appropriate levels of penalties and audits to limit the above risks.
13.c. In the context of Scenario 3: Use of carbon credits from mitigation activities within the value chain to substantiate value chain emission reduction claims, what additional considerations should the SBTi take into account when further examining this scenario?
We welcome this innovative proposition that might help standardize and consolidate emission reduction claims and contribute to knowledge sharing but would like to raise a few points, on top of relevant elements above:
- Increased risk of double counting. With the recent raise in the use of supplier based emission factors, we worry the competing use of certificates will result in double counting emission reduction.
- Credit sharing. We recommend staying vigilant regarding the emission reduction results from industrial collaborations, and argue credit sharing needs to be addressed to avoid double issuing.
- Baseline emissions. We fear the current definition might be overlooked and companies will get confused between avoided emissions and emission reductions. We recommend underlining baseline emissions for credits should not be derived from an imaginary scenario but from the actual company scope 1 & 2 baseline.
13.d. In the context of Scenario 4: Use of carbon credits to support neutralization of residual emissions, what additional considerations should the SBTi take into account when further examining this scenario?
We agree in principle that carbon capture and storage is an unevenly distributed luxury. In this context, a globalized credit market helps resources meet the most needy.
However, we argue that the current definition of residual emissions isn’t science based. Residual emissions should be the 5-10% most cost intensive emissions to abate across all sectors, not the 10% most costly to abate emissions from any sector. We suggest imposing different credit usability levels across activities based on their emissions' abatement curves, although we realize all the necessary information might not be available. Another option would be to refer to the IPCC’s sectoral mitigation reports and study each sectors’ projected emissions in comparison with their current emission reduction action plan.
Furthermore, we insist on the need to integrate emissions from CCUS project into the buyer’s scope 3, which is often overlooked. This could help to ensure chosen CCUS are actually profitable from an emissions' perspective, which is currently not always the case.
Lastly, we would advise against establishing fungibility between removal methods, as they have varying externalities that have yet to be fully uncovered and drive down the price of projects with less priority. Establishing fungibility would thus massively drive investments towards these low cost, high risk and consequence projects.
13.e. In the context of Scenario 5: Use of carbon credits to support beyond value chain mitigation, what additional considerations should the SBTi take into account when further examining this scenario?
While we recognize the need for financing mitigation in low income countries, we argue this should remain optional and separate from any other considerations. At least, credit purchase level recommendations should be kept to a minimum and progressively replaced by carbon capture and storage credits. Indeed, currently, the projects suffer poor credibility and credits are often used to justify a lack of ambition in corporate emissions' mitigation.
We recommend referring to the Oxford Net Zero aligned offsetting principles or the Net Zero initiative principles for further recommendations on how to handle this topic, and investigating the possibility of setting targets of credits purchase for each company based on their gross margin.
14. What other potential risks do you see in addition to those described in Annex VI? How could these be mitigated?
We underline that the more options exist, the more loopholes are available for companies to choose the path of least constraint and climate ambition. This might lessen the credibility of the SBTi certification as diligent companies are drowned by opportunists. Further, the complexity of resulting commitment information might contribute to the overall information fatigue in the ESG sector.
Further, we think the proposition (outcomes metrics, certificate handling) will give SBTi even further influence on our economy than it currently has. We would appreciate further transparency in the decision processes to set the framework and further study the consequences of eventual arbitrary choices.
All in all, we call into question the alignment of the current SBTi framework and possible changes with upcoming mandatory reporting directive and reduction expectations, especially those from the CSRD; and the adequacy of letting a private actor define matters of such importance alone.
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