“Carbon leakage occurs when industries transfer polluting production to other countries with less stringent climate policies or when more carbon-intensive imports replace EU products”, Gangaa C. Sharma, Managing Director & CEO, CETIZION Verifica.

Gangaa C. Sharma serves as the Managing Director and CEO of CETIZION Verifica, a prominent global advisory and audit company. With an extensive career spanning over 27 years, he brings a wealth of experience across diverse sectors and geographies, including India, Asia Pacific, China, the Gulf, and the EU. Sharma's expertise encompasses manufacturing, environmental health and safety, CSR, biodiversity, climate change, social and labour issues, as well as ethics and governance. Notably, he is a distinguished member of the Global Sustainability Standard Board under the auspices of the Global Reporting Initiative (GRI), a leading global sustainability and climate change initiative, and an advocate for ESG reporting frameworks. Recognised as a worldwide expert in Aluminium Sustainability, Sharma has undertaken over 25 engagements, solidifying his position as a thought leader in sustainability and corporate responsibility.

AL Circle: Can you please elaborate on the concept of Carbon Leakage?

Gangaa C Sharma: The European Union (EU) has announced the Carbon Border Adjustment Mechanism (CBAM). This mechanism aimed to tax the producers for the production emission rates for their products at the EU border. The CBAM, which the European Commission adopted on July 14, 2021, will apply to EU imports. It has been recommended in the European Green Deal to cut greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels. Because other nations may not have a comparable aim, the EU created this method to avoid carbon leakage.

Carbon leakage occurs when industries transfer polluting production to other countries with less stringent climate policies or when more carbon-intensive imports replace EU products.

As the EU raises its own climate ambition, but less stringent environmental and climate policies prevail in non-EU countries, there is a strong risk of so-called ‘carbon leakage’, which can shift emissions outside Europe and seriously undermine EU and global climate efforts. Therefore, the concept of Carbon leakage evolved and became a central part of CBAM.

AL Circle: Can you please share the latest developments related to CBAM (Carbon Border Adjustment Mechanism), rolled out by the EU, and how it can become an effective tool to address Carbon Leakage?

Gangaa C Sharma: The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at the most significant risk of carbon leakage. Aluminium is one of the sectors covered under CBAM. The other sectors are cement, iron and steel, fertilisers, electricity and hydrogen.

AL Circle: How can CBAM impact non-EU aluminium-producing countries?

Gangaa C Sharma: Once the permanent system enters into force on January 1, 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS (Emissions Trading System) allowances expressed in €/tonne of CO2 emitted.

If EU importers can prove, based on verified information from third-country producers, that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted from their final bill.

AL Circle: Can the multi-national aluminium producing companies get any advantage as a part of CBAM?

Gangaa C Sharma:  The multi-national aluminium producing companies that are able to demonstrate lower GHG intensities will attract overall market competitiveness in terms of higher industry demand, access to financing/investment, and fulfilling public expectations

What are the reporting time-related guidelines in CBAM?

Gangaa C Sharma: From 2023 to 2026, a three-year transition period will be introduced during which EU officials will test CBAM without levying any taxes. As a result of this trial, the system will be commissioned at the beginning of 2026.

Beginning October 2023, quarterly reporting in the prescribed template shall be submitted by the last day of the next month until December 2025, e.g. October 2023-December 2023 quarter period by January 31, 2024, January 2024-March 2024 by April 30, 2024.

How can CETIZION Verifica help Aluminium companies to become CBAM compliant?

Gangaa C Sharma: CETIZION Verifica has global expertise and skills to support aluminium producers in better understanding and complying with CBAM requirements. Some of them could be Greenhouse Gas (GHG) emission reporting as per ISO 14064, Strategic CBAM and ETS Risk and Cost Analysis, and due diligence for Renewable investments.