CBAM Draft Update: Carbon Price Deductions Now Include International Carbon Credits (10% Cap)

Big News: CBAM Carbon Price Deduction Implemented – Latest Draft Allows International Carbon Credits with 10% Cap

The EU has published draft legislation clarifying how importers can calculate the carbon price paid in producer countries. This Draft Implementing Regulation for the application of (EU) 2023/956 ("CBAM Regulation") explains how the EU will recognise carbon payments made overseas, preventing importers from being double-taxed on emissions.

Interestingly, alongside local Emissions Trading Systems (ETS) and carbon taxes, the EU has also outlined that carbon credits—specifically those linked to Article 6 of the Paris Agreement—can be used. Importantly, the carbon price paid, will also have to undergo independent third party verification to be considered valid.

How are costs calculated in CBAM? When EU importers pay their CBAM obligations, the baseline price is calculated using this core formula:

CBAM Liability = Tonnes of Good × (Embedded Emissions − Free Allocation) × CBAM Certificate Price

A Worked Example (Before Deductions)

Imagine an importer bringing in 1,000 tonnes of aluminium rods from an installation in Türkiye.

• Specific embedded emissions: 2.5 tCO₂e/t of goods
• Specific free allocation: 1.4 tCO₂e/t
• CBAM certificate price: €75 • Assumption: The EU maintains the cross-sectoral correction factor at 100%. First, we calculate the net emissions per tonne of product:

Net emissions = 2.5 tCO₂e/t − 1.4 tCO₂e/t = 1.1 tCO₂e/t

Then, we calculate the initial liability before any deductions:

Initial Liability = 1,000 t × 1.1 tCO₂e × €75 = €82,500

How does the "Carbon Price Paid" affect this?

Importers can deduct the effective carbon price already paid in the country of origin. However, because third-country carbon markets (like Türkiye's ETS) often calculate total emissions using different boundaries than the strict EU CBAM methodology, this deduction must be normalised. Rather than trying to match up mismatched emissions data, the total carbon tax paid locally is converted into a flat carbon price paid per tonne of product.

If the carbon price paid in Türkiye works out to exactly €20 per tonne of product (after taking into account currency conversion and local free allocations), the liability drops significantly:

Initial Liability = €82,500

Deduction = 1,000 t × €20 = €20,000

Final Liability = €82,500 − €20,000 = €62,500

Meaning that the importer would pay €20,000 less for CBAM certificates when the goods clear into the EU.

The Role of Carbon Credits and Article 6 of the Paris Agreement A major question leading up to this regulation was whether voluntary carbon offsets could be used to reduce CBAM liability. The draft implementing regulation answers this with strict boundaries. The EU will allow carbon credits to count towards the “carbon price already paid,” but only under three specific conditions:

• The Compliance Mandate: You cannot simply buy voluntary offsets on the open market to erase your CBAM liability. The credits must be legally recognised and surrendered as a valid compliance option within the producer country's own domestic carbon pricing scheme (like their local ETS or carbon tax).
• Domestic vs. International Credits: If the producer uses credits generated locally within their own country, they can be counted without additional hurdles. However, if they use international credits, the EU will only recognise them if they are issued under Article 6 of the Paris Agreement.
• The 10% Limit: To ensure that the primary focus remains on actual, physical decarbonisation at the factory level, the draft regulation places a strict cap. Importers can only claim international Article 6 credits to cover a maximum of 10% of the reported emissions of the imported goods. There will not be a limit to deductions claimed for credits issued under national emissions trading systems.

The latest draft, once approved, will ensure importers aren't effectively charged twice for the same tonne of carbon by recognising the carbon price paid in the country of origin. While international Article 6 credits can now count towards this total, they are capped at 10% in order to protect the incentive for actual emissions reductions at the factory level.