Carbon footprint reporting has been a hot topic in sustainability circles, particularly around the need for scope 3, or indirect supply chain, emissions. Many manufacturers have taken steps to account for their own greenhouse gas (GHG) footprints, but capturing emissions data from their supplier’s activities has been more challenging.
The EU’s Carbon Border Adjustment Mechanism (CBAM), a carbon tax, adopted in August 2023, is setting new expectations, forcing businesses importing goods to the EU market to address their supply chain’s carbon emissions. Notably, CBAM is just one of several emerging regulations that are refocusing environmental, social, and governance (ESG) management into the supply chain. Regulators are now monitoring the embedded carbon footprint of goods coming into their countries, and putting the onus of data collection and due diligence on manufacturers and importers.
Let’s take a deeper look at CBAM and how it fits within the global trend of supply chain ESG requirements being built into market access regulations.
Understanding CBAM
CBAM is the EU’s new carbon tax on imported goods, with the goal of equalizing the carbon price paid by European producers with those outside the EU. CBAM aims to mitigate the risk of “carbon leakage” — when manufacturers move production to countries with laxer environmental policies — to support the EU’s greater climate goals.
Companies importing goods into the EU will be required to purchase CBAM certificates to bridge the gap between products operating under the EU Emissions Trading System (ETS) and those made in other countries. This new requirement means it’s no longer more cost-effective to produce carbon-intensive goods in a foreign country for the EU market.
New Reporting Requirements & Penalties
Starting July 31, 2024, CBAM reporting requirements for embedded emissions will become more stringent. Previously, importers could use estimates, relying on default emissions values published by the European Commission. But moving forward, importers will need to provide actual data for at least 80% of their affected goods. This shift demands more supply chain transparency and better collaboration with suppliers.
Importers must now collect real data from their suppliers, who may not be motivated to provide it or may lack the regulatory knowledge to collect it. As a result, importers may need to do the painstaking work of tracing data through multiple layers of their supply chains.
During the transitional phase, failure to submit a CBAM report, or submission of an incorrect/incomplete report, can lead to penalties ranging from €10–50 per metric ton of unreported emissions, adjusted for the EU consumer price index. Higher penalties apply if there are more than two consecutive incorrect/incomplete reports or if the failure to report exceeds six months.
Starting January 1, 2026, in the permanent system, companies will face penalties if they don’t surrender their CBAM certificates by May 31 for the previous year’s imports. The penalty is €100 per metric ton of CO2 equivalent, in addition to surrendering the required certificates. Companies that are not registered as authorized declarants but are importing CBAM goods will face much higher penalties, ranging from €300–500 per metric ton for each unsurrendered certificate.
Given these new requirements, importers will now need to report on the embedded emissions of goods imported into the EU, including information such as:
- The country of origin of the goods
- Where the goods were produced
- The geographical coordinates of the main emissions source of the facility in which the goods were produced
- Direct emissions related to the production process
- Indirect emissions through energy use
- Embedded emissions of relevant precursors (i.e., intermediate products like coke, sintered ore, and ferro-alloys, used in the production of final goods and specifically defined in the regulation)
Carbon price already paid (if any)
As a result, manufacturers in key GHG-intensive sectors such as electricity and heat generation, oil refining, steel, cement, chemicals, and commercial aviation will need to start collecting detailed scope 3 GHG emissions data from their supply chains.
Make sure your ESG efforts are defensible. Watch Assent’s on-demand webinar, Beyond the Buzzwords: Avoiding Greenwashing In Your Supply Chain, to learn how.
Supply Chain Sustainability Is the Regulatory New Normal
The EU’s implementation of CBAM is just one example of how emissions reporting is becoming a requirement for doing business. The larger consideration is how businesses can best prepare for emerging expectations related to emissions reporting and ESG.
There are more regulatory and market drivers related to emissions reporting in the works. For example, California Senate Bill 253 will require businesses making more than $1 billion USD in revenue to report their full carbon footprint, including scope 3 supply chain emissions. There’s also a strong regulatory trend in the EU for deeper supply chain due diligence: The European Sustainability Reporting Standards (ESRS) and Corporate Sustainability Reporting Directive (CSRD) are new regulations that will require companies to report on their sustainability performance. They are designed to improve the quality and transparency of sustainability reporting, and to help investors and other stakeholders make informed decisions about their investments.
It’s crucial for manufacturers to identify key drivers affecting market access now to build the right infrastructure today to start meeting these requirements. Collecting scope 3 data is difficult and time-consuming without a partner that does it for you. You don’t need to build your program from scratch — Assent provides a robust platform for supply chain sustainability management.
Take a Proactive Approach to Supply Chain Sustainability
The value of deep, defensible supply chain data goes beyond just complying with regulations. Companies that prepare for new emissions reporting expectations gain a competitive advantage by demonstrating their commitment to sustainability and transparency. Having accurate data can also help companies identify areas where emissions can be reduced to save costs and reduce their carbon footprint.
It is important for companies to start building this infrastructure today to meet future regulatory requirements and gain a competitive advantage in the marketplace. Building deep, defensible supply chain data can help manufacturers do so.
Here’s how to start developing a proactive approach to supply chain ESG to keep ahead of emerging regulatory pressures:
- Engage suppliers early and continuously. Involving suppliers early in your sustainability strategy is essential. It fosters understanding, cooperation, and alignment with your objectives. Regular communication aids in forming a shared vision and goals.
- Incorporate ESG in your supplier contracts. Clearly define sustainability objectives and suppliers’ role in achieving them. This can be done through formal agreements, like incorporating sustainability clauses into contracts or selecting suppliers already reporting their carbon footprint.
- Automate ESG data collection. Implement a system to help automate your supplier outreach and data validation, and make it easier for suppliers to submit sustainability data digitally.
Supply Chain ESG Is Here to Stay
As carbon emissions in the supply chain become a more critical data point, businesses need to prepare for the changing regulatory landscape. The EU’s implementation of CBAM signals the importance of collecting and reporting accurate carbon emissions data. Manufacturers must identify key drivers affecting market access and build the right infrastructure today to meet requirements and prepare for new emerging expectations related to emissions reporting. By having deep, defensible supply chain data, companies can more rapidly respond to ever-evolving regulatory requirements, reduce their carbon footprint, and build trust with customers. It’s time to take the first step toward a more sustainable future.
Now is the time to start planning your supply chain sustainability strategy for next year. Download a copy of Budgeting for Sustainability: Proactive Sustainability in 2024 for expert insights on creating a budget and action plan to support your ESG goals.
