Under the Carbon Border Adjustment Mechanism (CBAM) there are specific conditions regarding explicit capacity allocation in the electricity markets.

 

In principle, embedded emissions in goods other than electricity shall be determined based on actual data, when actual data is not available, default values will be used.

 

For electricity, however, the opposite rule is adopted - in principle emissions are to be determined based on default values and there are strict rules specifying conditions for applying actual data.

 

Recital 45 of the European Commission Proposal of 14 July 2021 for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism (COM(2021) 564 final, 2021/0214 (COD)) states as regards electricity that “default values should be used as a standard approach and it should be possible for authorised declarants to claim the calculation of their CBAM obligations based on actual emissions”.

 

The same Recital 45 of the draft Regulation explains that this different design for the CBAM is justified by:

  • the physical characteristics of electricity as a product, in particular the impossibility to follow the actual flow of electrons,
  • the fact that electricity trade is different from trade in other goods, notably because it is traded via interconnected electricity grids, using power exchanges and specific forms of trading, like, for example market coupling,
  • the need to avoid risks of circumvention and improve the traceability of actual CO2 emissions from import of electricity and its use in goods.

 

The calculation of actual emissions under the CBAM draft Regulation is only permitted through a number of strict conditions, in particular, it is necessary to demonstrate a firm nomination of the allocated interconnection capacity and that there is a direct contractual relation between the purchaser and the producer of the renewable electricity, or between the purchaser and the producer of electricity having lower than default value emissions (Recital 46).

 

Article 7(3) of the draft Regulation stipulates that embedded emissions in imported electricity shall be determined by reference to default values in accordance with the method set out in Annex III, point 4.2, unless the authorised declarant chooses to determine the embedded emissions based on the actual emissions in accordance with that annex, point 5.

 

The said Annex III, point 4.2 envisions that default values for imported electricity are to be determined based on either specific default values for a third country, group of third countries or region within a third country, or if those values are not available, on EU default values for similar electricity production in the EU.
 

Specific default values shall be based on the best data available to the Commission determining the average CO2 emission factor in tonnes of CO2 per megawatt-hour of price-setting sources in the third country, group of third countries or region within a third country.

 

Where specific default values are determined for a third country, a group of third countries or a region within a third country, and electricity is imported from another third country or another region into the third country, or another group of third countries or region within a third country with the purpose of being re-exported to the Union, the same specific default value shall not be used.

 

 

Alternative default values

 

 

Where no specific default value has been determined for a third country, a group of third countries, or a region within a third country, the default value for electricity shall represent the CO2 emission factor in the EU, in tonne of CO2 per megawatt-hour.


That means the weighted average of the CO2 intensity of electricity produced from fossil fuels in the EU. The weight reflects the production mix of the fossil fuels in the EU. The CO2 factor is the result of the division of the CO2 emission data of the energy industry divided by the gross electricity generation based on fossil fuels in megawatt-hour.

 

Where authorised declarants of goods originating in a third country, or for a group of third countries having a significant exchange of electricity with the EU, it can be demonstrated, on the basis of reliable data, that the average CO2 emission factor of price-setting sources in that third country or that group of third countries is lower than the one in the EU or lower than the specific default value, an alternative default value based on that average CO2e emission factor shall be established for that country or group of countries.

 

Where alternative default values are defined for a third country or region in a third country, or a group of third countries or regions within third countries, and electricity is imported from another third country or from another region within a third country, or another group of third countries or regions within third countries into the third country subject to the alternative default value, the same alternative default value may not be used.

 

Conditions to to applying actual embedded emissions instead of default values

 

 

According to Article III(5) of the draft Regulation an authorised declarant may require to apply actual embedded emissions instead of default values for the calculation (referred to in Article 7(3)) if the following cumulative criteria are met:

(a) the authorised declarant has concluded a power purchase agreement with a producer of electricity located in a third country for an amount of electricity that is equivalent to the amount for which the use of a specific value is claimed;
 
(b) the installation producing electricity is either directly connected to the EU transmission system or it can be demonstrated that at the time of export, there was no physical network congestion at any point in the network between the installation and the EU transmission system;
 
(c) an equivalent amount of electricity to the electricity for which the use of actual embedded emissions is claimed has been firmly nominated to the allocated interconnection capacity by all responsible transmission system operators in the country of origin, the country of destination and, if relevant, each third country of transit, and the nominated capacity and the production of electricity by the installation referred to in point (b) refer to the same period of time which shall not be longer than one hour;
 
(d) meeting the above criteria is certified by an accredited verifier. The verifier shall receive at least monthly interim reports demonstrating how the above criteria are fulfilled. 

 


European Commission Proposal of 14 July 2021 for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism, COM(2021) 564 final, 2021/0214 (COD)

Recitals 45, 46

(45) The physical characteristics of electricity as a product, in particular the impossibility to follow the actual flow of electrons, justifies a slightly different design for the CBAM. Default values should be used as a standard approach and it should be possible for authorised declarants to claim the calculation of their CBAM obligations based on actual emissions. Electricity trade is different from trade in other goods, notably because it is traded via interconnected electricity grids, using power exchanges and specific forms of trading. Market coupling is a densely regulated form of electricity trade which allows to aggregate bids and offers across the Union.
 
(46) To avoid risks of circumvention and improve the traceability of actual CO2 emissions from import of electricity and its use in goods, the calculation of actual emissions should only be permitted through a number of strict conditions. In particular, it should be necessary to demonstrate a firm nomination of the allocated interconnection capacity and that there is a direct contractual relation between the purchaser and the producer of the renewable electricity, or between the purchaser and the producer of electricity having lower than default value emissions.

Article 7
Calculation of embedded emissions
1. Embedded emissions in goods shall be calculated pursuant to the methods set out in Annex III.
2. Embedded emissions in goods other than electricity shall be determined based on the actual emissions in accordance with the methods set out in Annex III, points 2 and 3. When actual emissions cannot be adequately determined, the embedded emissions shall be determined by reference to default values in accordance with the methods set out in Annex III, point 4.1.
3. Embedded emissions in imported electricity shall be determined by reference to default values in accordance with the method set out in Annex III, point 4.2, unless the authorised declarant chooses to determine the embedded emissions based on the actual emissions in accordance with that annex, point 5.

Annex III p. 4.2

4.2. Default values for imported electricity in Article 7(3) Default values for imported electricity shall be determined based on either specific default values for a third country, group of third countries or region within a third country, or if those values are not available, on EU default values for similar electricity production in the EU, according to point 4.2.2.

4.2.1. Specific default values for a third country, group of third countries or region within a third country

Specific default values shall be based on the best data available to the Commission determining the average CO2 emission factor in tonnes of CO2 per megawatt-hour of price-setting sources in the third country, group of third countries or region within a third country.

Where specific default values are determined for a third country, a group of third countries or a region within a third country, and electricity is imported from another third country or another region into the third country, or another group of third countries or region within a third country with the purpose of being re-exported to the Union, the same specific default value shall not be used.

4.2.2. Alternative default values

Where no specific default value has been determined for a third country, a group of third countries, or a region within a third country, the default value for electricity shall represent the CO2 emission factor in the EU, in tonne of CO2 per megawatt-hour.
That means the weighted average of the CO2 intensity of electricity produced from fossil fuels in the EU. The weight reflects the production mix of the fossil fuels in the EU. The CO2 factor is the result of the division of the CO2 emission data of the energy industry divided by the gross electricity generation based on fossil fuels in megawatt-hour.

Where authorised declarants of goods originating in a third country, or for a group of third countries having a significant exchange of electricity with the EU, it can be demonstrated, on the basis of reliable data, that the average CO2 emission factor of price-setting sources in that third country or that group of third countries is lower than the one in the EU or lower than the specific default value, an alternative default value based on that average CO2e emission factor shall be established for that country or group of countries.

Where alternative default values are defined for a third country or region in a third country, or a group of third countries or regions within third countries, and electricity is imported from another third country or from another region within a third country, or another group of third countries or regions within third countries into the third country subject to the alternative default value, the same alternative default value may not be used.