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0 1 Table of Contents Forewords.3 Chapter 1:Introduction.7 1.1.Purposes of this Guidebook:Providing a Practical and Actionable Roadmap.7 1.2.How this Guidebook was Compiled.7 1.3.Target Audience of this Guidebook.8 1.4.How You Should Read this Guidebook.8 Chapter 2:Mysteries and Key Questions about Carbon Management.10 2.1.What is Carbon or Carbon Footprint?.10 2.2.What is a Carbon Management System?.12 2.3.How Your Efforts and Achievements Could Be Recognised:Verification.14 2.4.Megatrends:Is Carbon Compliance and Carbon Pricing Coming?.15 2.5.Introduction to Relevant Standards.17 Chapter 3:Strategic Recommendations for Top Management.22 3.1.Keys to Carbon Management:A Summary of Chapter 2.22 3.2.Common Biases in Carbon or Sustainability Related Decision-Making.23 3.3.Criteria for Carbon Management Strategy and Examples.24 3.4.Decision-Making Process with Rating System.26 Chapter 4:Organisation Level Carbon Monitoring,Reporting and Verification.28 4.1.Establishing Management Commitment and Organisational Setup.28 4.2.Setting the Organisational Boundaries.30 4.3.Identifying GHG Emissions Sources.31 4.4.Collecting Data for Emissions Quantification.34 4.5.Managing Scope 3 Emissions.37 4.6.Calculating Emissions.43 4.7.Uncertainty and Recalculation.46 4.8.Reporting and Verification.49 4.9.Continuous Improvements.51 2 Chapter 5:Strategy and Operation for Carbon Emissions Reduction.55 5.1.Managing and Reducing Emissions in Operation:ISO 14001.55 5.2.Managing and Reducing Energy related Emissions in Operation:ISO 50001.58 5.3.Managing and Reducing Supply Chain Emissions:ISO 20400.60 5.4.Managing and Reducing Carbon Emissions at Source:PCF and Product Eco-design.63 Chapter 6:Roadmap for SMEs and Case Studies.67 Case Study 1:Baseline Assessment and Carbon Management System Set-up.67 Case Study 2:Energy Management and Process Optimisation for Decarbonisation.73 Case Study 3:Supply Chain Decarbonisation.78 Chapter 7:Lightweight Digital Solutions for Carbon Management in Manufacturing SMEs.83 7.1 Leveraging Existing Tools for Carbon Management.83 7.2 Implementation Steps for SMEs.85 7.3 Future Trends and Upgrades.85 Chapter 8:Guidebook Recap and Call to Action.87 List of Abbreviations.90 References.92 Acknowledgements.94 General Carbon Management Guidebook Forewords 3 Forewords At this pivotal moment in the global industrial restructuring,carbon management has transformed from an optional choice to a mandatory requirement for businesses.The emergence of carbon trading markets across the Asia-Pacific,alongside international green investment trends,is profoundly reshaping the competitive landscape for manufacturing.With decades industrial development and innovation capabilities across the Asia-Pacific,Hong Kong manufacturers are positioned to lead this transformative wave.The Federation of Hong Kong Industries(FHKI)has played a leading role in enabling SMEs to navigate environmental challenges.Since 2015,we have organised the annual BOCHK Corporate Low-Carbon Environmental Leadership Awards,recognising enterprises with outstanding sustainability performance.The programs steadily growing participation underscores the rising priority that industry now places on environmental issues and sustainable growth.In 2021,we established the Environmental,Social and Governance(ESG)Committee to further consolidate resources and strengthen industry engagement through seminars,workshops,and industry surveys,enhancing members understanding of carbon mitigation policies and strategies.Last year,through the Hong Kong Q-Mark Council,we launched the Hong Kong Q-Carbon Certification Scheme and Hong Kong Q-ESG Certification Scheme,providing professional accreditation services to assist SMEs in establishing robust carbon and ESG management systems.Hong Kongs manufacturers have built a comprehensive supply chain centred on Mainland China and extending across ASEAN.In this context,carbon management serves as a strategic opportunity to enhance corporate competitiveness in global markets.As a leading international financial and professional services centre,Hong Kong possesses a distinctive advantage in connecting global capital markets with green finance,providing comprehensive support for the green transformation of manufacturing.Through the synergy of finance,technology,and manufacturing,Hong Kong is poised to become a regional hub for green economic development,driving carbon neutrality across the Asia-Pacific.We recognise that SMEs often face difficulties in understanding and complying with complex carbon regulations,particularly when engaging with diverse international markets and rules.The two volumes of Carbon Management Guidelines seek to bridge that gap.By integrating international standards,CBAM regulations of EU,and the practical needs of Hong Kong manufacturers,these guides unpack complex requirements into clear,actionable steps,General Carbon Management Guidebook Forewords 4 supplemented with case studies and industry insights.The guidelines provide SMEs with the knowledge and tools required to transition seamlessly to low-carbon operations,while maintaining operational efficiency and market competitiveness.We firmly believe that,in the context of the regional green transformation,establishing scientific and systematic carbon management practices early will gain a strategic advantage,reinforcing Hong Kong manufacturings position in the global value chains.FHKI remains steadfast in our commitment to walk alongside with industry,guiding manufacturers to navigate the challenges and capitalise on the opportunities of green transformation.Through these two Carbon Management Guidelines,we deliver decisive,actionable roadmap to Hong Kong manufacturers to not merely adapt,but thrive in the carbon-neutral erapowering forward our national carbon peaking and carbon neutrality ambitions,and driving transformative progress in global sustainable development.Anthony Lam FHKI Chairman August 2025 General Carbon Management Guidebook Forewords 5 In the face of escalating climatic challenges,Environmental,Social and Governance(ESG)issues are garnering unprecedented attention.Regulatory pressure on ESG is accelerating worldwide,particularly with the European Unions(EU)recent implementation of the Carbon Border Adjustment Mechanism(CBAM)and the imposition of carbon tariffs.As a highly open and export-oriented economy,Hong Kong manufacturers will inevitably face carbon regulatory challenges,implying that carbon management must become an integral part of corporate decision-making and daily operations for SMEs.The Federation of Hong Kong Industries(FHKI)established the ESG Committee in 2021,dedicated to promoting industrial participation in achieving Hong Kongs goal of carbon neutrality by 2050.Through capacity building,knowledge exchange and ESG talent development,the Committee supports the industry sector in implementing effective ESG management.To strengthen the carbon management capabilities across the industry,and with the funding support from the Trade and Industry Departments Trade and Industrial Organisation Support Fund(TSF),we commissioned the Institute of Climate and Carbon Neutrality at the University of Hong Kong to launch the Project,“Facilitating ESG compliance in supply chain management for Hong Kong-invested manufacturing enterprises(HKMEs)”.The Project includes hosting the APAC ESG Summit for SMEs,compiling two Carbon Management Guidelines,and developing an online carbon management platform to help businesses take practical actions in response to increasingly stringent regulatory requirements.The two Carbon Management Guidelines are designed specifically for Hong Kong-funded manufacturing enterprises with production lines and supply chains operating across the Asia-Pacific region.Targeting the decision-makers,operational departments and green professionals,the Guidelines emphasise operability and practical application,providing the industry with step-by-step guidance.The Carbon Management Guidelines for Carbon Neutrality and Sustainable Development Targets of Hong Kong and Mainland China(“General Carbon Management Guidebook”)focus on internal corporate management,introducing international standards and systems,and detailing how to establish and optimise carbon management systems,accurately capture carbon data,and implement emission reduction actions.The Carbon Management Guidelines for EU Carbon Border Adjustment Mechanism(CBAM)Compliance(“EU CBAM Guidebook”),on the other hand,focuses on analysing compliance and practices for the two major CBAM in-scope industries,iron and steel,and aluminium,addressing emissions calculation,data collection,reporting,and verification processes,illustrated with case studies.These complementary guides the former emphasising internal capacity building and long-term transformation,the latter providing specialised analysis and strategies for CBAMoffer a systematic blueprint and action plan for the Hong Kong General Carbon Management Guidebook Forewords 6 manufacturers to establish comprehensive ESG management systems under the increasingly stringent international environmental requirements.While tightening international carbon management trends present significant challenges for the manufacturing industry,early preparation for relevant regulations can transform these challenges into a competitive advantage.With these two Carbon Management Guidelines,FHKI aims to heighten industry vigilance toward international carbon regulations,empower enterprises to build robust carbon management systems ahead of competitors,transform regulatory challenges into strategic advantages and forge greener,more resilient supply chainsultimately reinforcing Hong Kong manufacturings competitive edge in global markets.Clara Chan Executive Deputy Chairman,FHKI Chairman,Steering Committee Facilitating ESG Compliance in Supply Chain Management for HKMEs Jude Chow Executive Deputy Chairman,FHKI Chairman,FHKI ESG Committee August 2025 General Carbon Management Guidebook Chapter 1:Introduction 7 Chapter 1:Introduction 1.1.Purposes of this Guidebook:Providing a Practical and Actionable Roadmap As the world transitions towards a low-carbon economy,carbon management has become a critical business imperative.Hong Kong Manufacturing Enterprises,especially SMEs which form the backbone of Hong Kongs manufacturing sector,must equip themselves with the knowledge and tools to navigate evolving regulations,enhance competitiveness,and drive sustainable growth.This guidebook is designed to serve as a practical and actionable roadmap for SMEs embarking on their carbon management journey to achieve the following objectives:Support HKMEs in Carbon Management:This guidebook provides actionable insights and practical steps to help HKMEs establish or enhance their carbon management systems.It assists companies in quantifying,monitoring,and reducing their carbon emissions,thereby aligning with global sustainability expectations and gaining a competitive advantage through eco-friendly operations.Enhance Compliance with Existing and Future Carbon Regulations:While focusing on carbon management,this guidebook also prepares HKMEs for existing and potential future regulations,such as the EU Carbon Border Adjustment Mechanism(CBAM).It offers strategies to manage and report carbon emissions accurately,ensuring that HKMEs are ready for any forthcoming compliance requirements.Promote Carbon Neutrality and Sustainable Development:By adopting the practices outlined here,HKMEs can play a role in achieving carbon neutrality targets not only in Hong Kong but also in Mainland China and the broader Asia-Pacific region.This contributes to global climate commitments,including the Paris Agreement,and positions HKMEs as leaders in sustainable manufacturing.1.2.How this Guidebook was Compiled This guidebook was developed through a comprehensive approach that combined literature reviews of global carbon measurement and reporting standards with deep-dive interviews and site visits to representative HKMEs.These activities helped us understand their baseline capabilities and identify technical gaps.We gathered additional feedback through meetings with diverse General Carbon Management Guidebook Chapter 1:Introduction 8 manufacturing companies and stakeholders from industry associations and academia.The case studies in this guidebook present fictional names but incorporate real examples from our interviews,accurately reflecting the challenges and opportunities facing HKMEs.1.3.Target Audience of this Guidebook The primary audience for this guidebook includes:Companies in All Manufacturing Sectors:This guidebook is relevant to all HKMEs,regardless of whether their sector is currently or soon to be regulated under carbon-related mechanisms.Manufacturers seeking to reduce their carbon emissions,improve sustainability,and prepare for future regulations will find this guide invaluable.Supply Chain Partners and Stakeholders:Beyond manufacturers,this guidebook is useful for suppliers,industry associations,and stakeholders who are interested in understanding the carbon implications on manufacturing processes and the broader impact on global trade.This guidebook aims to empower all levels of HKMEs to take proactive steps towards carbon management,ensuring they remain competitive and sustainable in an ever-evolving global market.1.4.How You Should Read this Guidebook This comprehensive guidebook is structured to provide actionable insights and detailed guidance across its chapters.Below is an outline of its contents against the targeted audiences:General Carbon Management Guidebook Chapter 1:Introduction 9 Strategy:Top Management Operation:Production,Supply Chain,R&D,IT Expertise:Carbon/Energy/EHS/ESG Specialist(s)Chapter 2:Mysteries and Key Questions about Carbon Management:Explains core concepts like carbon footprint,CMS,verification,and global trends.Read at least Sections 2.1,2.2,and 2.4 to grasp the core concepts and megatrends.Skimming is suggested to understand the basics.Read all and be the champion within your organisation.Chapter 3:Strategic Recommendations for Top Management:Provides guidance on strategy,decision-making biases,and criteria for carbon management.Read all.This chapter is designed for you.Skimming is suggested to understand the strategic thinking.Read all to understand how to align technical proposals with managements decision-making process.Chapter 4:Organisation Level Carbon Monitoring,Reporting and Verification:A step-by-step guide to setting up an organisational GHG inventory based on ISO 14064-1.Skimming is suggested to understand the process.Production,Supply Chain,and IT teams should read this chapter as they are key data providers and implementers.Read all.This is your core technical guide.Chapter 5:Strategy and Operation for Carbon Emissions Reduction:Covers practical reduction strategies using frameworks like ISO 14001,ISO 50001,and eco-design.Skimming is suggested to understand the available reduction strategies.Read all.This chapter provides practical strategies for your departments.Read all to guide the implementation of reduction strategies.Chapter 6:Roadmap for SMEs and Case Studies:Presents practical case studies on setting up a CMS,energy management,and supply chain decarbonisation.Skimming at least one case study is suggested.Read at least one case study relevant to your area to see practical application.Read all to understand practical application and challenges.Chapter 7:Lightweight Digital Solutions for Carbon Management in Manufacturing SMEs:Highlights the use of low-cost digital tools to streamline carbon management.Skimming is suggested to understand the low-cost approach.IT and Supply Chain teams should read this chapter to identify and implement practical digital tools.Read this chapter to recommend and support the implementation of these tools.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 10 Chapter 2:Mysteries and Key Questions about Carbon Management There are several key questions and mysteries surrounding carbon management that SMEs often struggle with as they embark on their sustainability journey.2.1 What is Carbon or Carbon Footprint?Definition of Carbon:In the context of carbon and greenhouse gas(GHG)management,carbon typically refers to carbon dioxide(CO)emissions,as well as other GHGs like methane(CH),nitrous oxide(NO),and fluorinated gases.It includes direct emissions and indirect emissions:Direct emissions are those emitted from sources that are owned or controlled by the reporting entity,such as emissions from burning fuel in on-site machinery.Indirect emissions,on the other hand,are emissions that result from activities of the company but occur at sources owned or controlled by another entity,including those from use of electricity and other imported energy,and those from upstream and downstream activities.These indirect emissions are monitored because they represent a significant portion of a companys total carbon emissions and are crucial for a comprehensive emissions reduction strategy.Note:Unless explicitly stated otherwise,the terms Carbon and GHG are intended to represent the same concept and may be used interchangeably.Clarifying Carbon Footprint:The term carbon footprint can be misleading due to its varying interpretations.Depending on the context and purpose,it could refer to different reporting scopes and calculation methods.In general,there are 4 quantification and reporting levels with the corresponding standards or regulations:General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 11 Quantification and Reporting Level Commonly Used Standards or Prevailing Regulations(Examples)Organisation level:Quantification and reporting of emissions from an entire organisation.ISO 14064-1,GHG Protocol Project or activity level:Emissions associated with specific projects or activities.ISO 14064-2,The GHG Protocol for Project Accounting Product level:Emissions over the products lifecycle,known as Product Carbon Footprint(PCF).ISO 14067,The Product Life Cycle Accounting and Reporting Standard Specific Scope Subject to Regulations EU ETS,EU CBAM,etc.The monitoring scope,quantification methods for specific emission sources,data requirements,and other factors vary across these carbon emissions.Please refer to Section 2.2 for details of the relevant standards.Comparing the carbon emissions of an installation under the EU Emissions Trading System(ETS)with its competitors total carbon emissions based on the GHG Protocol in its ESG report would lead to a misinterpretation due to different scopes and methodologies.Similarly,the Product Carbon Footprint of a product calculated based on ISO 14067 differs significantly from the Specific Embedded Emissions of that product under CBAM.Call-out Box:We recommend using specific terms rather than carbon footprint to avoid confusion.Where carbon footprint is used,it should refer solely to Product Carbon Footprint based on ISO 14067 or similar Life Cycle Assessment(LCA)methodologies.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 12 2.2 What is a Carbon Management System?A Carbon Management System(CMS)is a set of guidelines and tools that help companies keep track of and reduce the greenhouse gases(GHGs)they produce.This definition is straightforward;however,there is currently no global management system standard specifically for carbon management.Instead,it is managed within the framework of the Environmental Management System(such as ISO 14001)and quantified and reported via dedicated greenhousegas accounting standards(such as ISO 14064-1).Heres a simple explanation:A System to Manage Emissions:A CMS is like a roadmap that guides companies on how to measure,manage,and lower their carbon emissions using standards like ISO 14064-1(or GHG Protocol)for quantification and reporting.It gives you steps to follow,like:o Collecting information on where and how much GHGs your company is emitting.o Calculating the total emissions.o Setting goals to reduce these emissions.Integration with Management Systems:Since ISO 14064-1 is only a standard for quantification and reporting,a CMS is often built upon and closely integrated with existing Environmental Management Systems(EMS)like ISO 14001 and Energy Management Systems(EnMS)like ISO 50001.This integration ensures that carbon management becomes part of your companys daily operations.Continuous Improvement:Just like improving any part of your business,a CMS helps you keep getting better at managing carbon.You:o Make a plan to reduce emissions.o Put that plan into action.o Check if its working.o Adjust your plan if its not.Planning Ahead:A CMS,guided by ISO 14064-1(or the GHG Protocol),helps you:o Find out where your company is making the most emissions.o Set realistic goals to reduce these emissions.o Come up with ways to meet these goals.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 13 o Follow the rules set by governments or voluntary commitments.Getting Everyone Involved:Its not just about your company;its about working with everyone from your employees to your suppliers and customers to reduce emissions together.Keeping Records:You need to keep good records of your emissions,what youre doing about them,and how well youre doing.This is important for:o Managing your business internally.o Reporting to others like investors or regulators.o Getting checked by outside auditors to make sure youre doing it right,in line with standards like ISO 14064-1.Verification and Certification:While not required,you can get an outside group to check your work using ISO 14064-1 to ensure youre counting emissions correctly and that your reduction plans are working.Why Its Good for Your Business:o Save Money:By using energy and resources better,you can lower your costs.o Good Reputation:People and businesses like to work with companies that care about the environment.o Stay Legal:It helps you follow the rules and prepare for future carbon-related laws or taxes.o Better Supply Chain:It encourages your suppliers and customers to also reduce emissions,making the whole supply chain greener.o Manage Risks:It helps you plan for changes caused by climate change.In short,a Carbon Management System,based on ISO 14064-1(or complemented by the GHG Protocol)for quantification,reporting and broader management strategies,is a practical way for companies to manage their carbon emissions.This guidebook will show SMEs how to set up or improve their CMS,leveraging these standards,to realise these benefits.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 14 2.3 How Your Efforts and Achievements Could Be Recognised:Verification Verification is the process that validates and confirms your companys carbon management efforts.Heres how they work and what they can achieve:What it involves:Verification is an independent assessment of your companys GHG emissions data,calculations,and reduction claims.It is typically conducted by an external,accredited verifier or auditor.Based on Standards:Verification can be done in accordance with:o ISO 14064-3:This standard provides guidelines for the verification and validation of GHG assertions.It ensures that the data and claims made by the organisation are accurate,complete,and consistent with the standards used for quantification.o GHG Protocol:Although not a verification standard itself,many companies use GHG Protocol alongside ISO 14064-3 to ensure their emissions data aligns with international best practices.o Product Carbon Footprint(PCF):Verification of PCF,based on ISO 14067,can confirm the carbon emissions associated with a products lifecycle.o Environmental Product Declaration(EPD):Verification of EPDs provides a standardised way to communicate a products environmental impacts.An EPD can include PCF as one of its environmental impact categories.Results:A verification report will:o Confirm the accuracy of your emissions data.o Validate your emissions reduction claims.o Identify any discrepancies or areas for improvement.o Provide a level of assurance(limited or reasonable)on the datas reliability.Achievements:Verification can help achieve:o Credibility:It enhances the credibility of your carbon management efforts by providing external validation.o Regulatory Compliance:Some regulations or voluntary programs might require verification to ensure compliance with emissions reporting.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 15 o Investor and Stakeholder Confidence:Verified data can be more trustworthy for investors,customers,and other stakeholders.o Compliance with ETS and CBAM:Verification is essential for compliance with Emission Trading Systems(ETS),such as the EU ETS,where accurate data is required for trading purposes,and for the Carbon Border Adjustment Mechanism(CBAM),where the carbon content of imported goods must be verified.In summary,verification is the crucial steps in demonstrating the effectiveness and integrity of your carbon management system or products environmental impact.By adhering to recognised standards like ISO 14064-1ISO 14067,ISO 14068-1,your company can not only ensure compliance with regulatory or customer requirements but also gain a competitive edge in the market by showcasing your commitment to sustainability.This guidebook will delve into how SMEs can navigate these processes to maximise their benefits.2.4 Megatrends:Is Carbon Compliance and Carbon Pricing Coming?The global landscape for carbon management is rapidly evolving,driven by several megatrends that signal a shift towards mandatory carbon compliance and carbon pricing mechanisms:Increased Environmental Awareness:Public consciousness about climate change is at an all-time high.Consumers,investors,and stakeholders are increasingly demanding that companies take proactive steps to reduce their carbon emissions.Regulatory Pressure:Governments worldwide are stepping up their efforts to combat climate change:o Emission Trading Systems(ETS):Schemes,including the EU ETS and others,are expanding,with more countries and regions adopting cap-and-trade systems to limit carbon emissions.o Carbon Taxes:Some nations are implementing or considering carbon taxes to internalise the cost of carbon emissions,making polluters pay for their environmental impact.o Carbon Border Adjustment Mechanism(CBAM):The EU has introduced CBAM to prevent carbon leakage by imposing a carbon cost on imports from countries with less stringent climate policies.This initiative not only encourages more countries to consider implementing their own CBAM-like mechanisms,but General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 16 also leads more countries to build or expand their domestic ETS to avoid CBAMs additional costs.o Mandatory Reporting:Regulations such as the EU Battery Regulation mandate companies to report on their carbon footprint,driving greater transparency in carbon emissions.Corporate Initiatives:o Voluntary Carbon Markets:Companies are voluntarily participating in carbon markets to offset their emissions and meet sustainability goals.o SBTi(Science Based Targets initiative):More companies are committing to science-based targets to reduce emissions in line with what the latest climate science deems necessary.Technological Advancements:Innovations in carbon capture and storage,renewable energy,and energy efficiency are making it easier and more cost-effective for companies to reduce their carbon emissions.Investor Pressure:Institutional investors are increasingly considering environmental,social,and governance(ESG)factors in their investment decisions,with a focus on carbon risk.This trend is driving companies to manage their carbon emissions more aggressively.Supply Chain Requirements:Large corporations are imposing carbon reduction requirements on their suppliers,creating a ripple effect throughout the supply chain,pushing SMEs to comply with carbon management standards.Consumer Demand:Eco-conscious consumers are choosing products and services based on their environmental impact,which can influence corporate behaviour towards reducing carbon emissions.What this means for SMEs:Compliance:SMEs will likely face increasing regulatory requirements to report,manage,and reduce their carbon emissions.Compliance with these regulations will become a necessity to continue business operations and access markets.Cost Implications:Carbon pricing mechanisms,whether through taxes or trading,will add costs to carbon-intensive activities,incentivising SMEs to reduce emissions or invest in offsets.Competitive Advantage:Companies that proactively manage their carbon emissions can gain a competitive edge,attract eco-conscious General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 17 consumers,and secure investments from sustainability-focused investors.Opportunities:SMEs can find new business opportunities in carbon reduction technologies,renewable energy solutions,and by offering carbon management services to other businesses.Carbon compliance and carbon pricing are not just emerging trends but are becoming integral components of the business landscape.SMEs should prepare for these changes by understanding the implications,adapting their business practices,and positioning themselves to benefit from the shift towards a low-carbon economy.This guidebook will provide practical steps for SMEs to navigate these megatrends effectively.2.5 Introduction to Relevant Standards For many companies esp.SMEs,managing carbon emissions can feel like a daunting task,but with the right standards in place,it becomes a structured and manageable process.These standards provide a common language,methodology,and framework that help in quantifying,reporting,and reducing your carbon emissions.By following these standards,companies can:Improve Operational Efficiency:Standards like ISO 9001,ISO 14001,and ISO 50001 help streamline processes,reduce waste,and optimise energy use,all of which contribute to lower carbon emissions.Ensure Credibility and Transparency:Standards like ISO 14064 and GHG Protocols provide a way to accurately measure and report your emissions,ensuring that your efforts are verifiable and credible to stakeholders.Meet Regulatory Requirements:Compliance with standards such as EU CBAM can be mandatory for companies in certain sectors accessing the EU market.Set Ambitious Goals:Initiatives like SBTi help set science-based targets,ensuring that your carbon reduction efforts align with global climate goals.Communicate Environmental Impact:Standards like ISO 14068-1 allow for clear communication of your organisations carbon neutrality,appealing to eco-conscious consumers and investors.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 18 Fundamental Carbon-Related Management Systems for Corporations:ISO 9001:Quality Management System o Objective:Establishes a framework for improving quality and customer satisfaction through effective management systems.o Relevance to Carbon Management:While not explicitly about carbon in current version,ISO 9001 provides a structured approach for managing processes,which can include carbon management practices.It encourages continuous improvement,which can be applied to reducing carbon emissions.It is worth noting that ISO 9001 is reportedly slated for a 2026 revision to include climate-change response in the standard,requiring organisations to assess climate-related risks and their impacts.ISO 14001:Environmental Management System o Objective:Focuses on improving environmental performance through a systematic approach to environmental management.o Relevance to Carbon Management:ISO 14001 sets out requirements for an environmental management system that can encompass carbon management.It promotes the identification of significant environmental aspects,including GHG emissions,and drives companies to set and achieve environmental objectives.ISO 50001:Energy Management System o Objective:Provides a framework for establishing systems and processes necessary to improve energy performance,including energy efficiency,use,and consumption.o Relevance to Carbon Management:By managing energy more efficiently,companies can significantly reduce their carbon emissions.ISO 50001 helps organisations establish a policy for energy efficiency,identify significant energy uses,and set targets for improvement.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 19 Fundamental Standards for Carbon Quantification,Reporting,and Compliance:ISO 14064-1 and GHG Protocols:Quantification,Verification,and Reporting o ISO 14064-1:Specifies principles and requirements for quantifying and reporting GHG emissions and removals at the organisational level.It provides guidance on how to report GHG emissions to stakeholders.o GHG Protocols:Developed by the World Resources Institute(WRI)and the World Business Council for Sustainable Development(WBCSD),these protocols offer guidance for accounting and reporting GHG emissions.Many companies use the GHG Protocol to supplement ISO 14064-1 because it offers detailed guidance on Scope 3 emissions.ISO 14064-2:Project-Level GHG Quantification and Monitoring o Objective:Provides guidance for quantifying,monitoring,and reporting GHG emissions reductions or removals at the project level.o Relevance to Carbon Management:This standard is crucial for companies involved in carbon offsetting projects or those seeking to demonstrate emissions reductions from specific initiatives.ISO 14067:Product Carbon Footprint o Objective:Provides a framework for quantifying and communicating the carbon footprint of products,including goods and services.o Relevance to Carbon Management:ISO 14067 enables companies to assess the carbon impact of their specific products across their lifecycle,from raw material extraction to disposal or recycling.This can inform product design,supply chain management,and consumer communication.PAS 2060 and ISO 14068:Carbon Neutrality o PAS 2060/ISO 14068:Specification for the demonstration of carbon neutrality,providing requirements for quantifying,reducing,achieving and demonstrating carbon neutrality.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 20 o Relevance to Carbon Management:These standards guide organisations in offsetting their carbon emissions,ensuring that claims of carbon neutrality are credible and verifiable.Emission Trading Systems(using EU ETS as an example)o EU ETS:The worlds first major carbon market,it sets a cap on the total amount of certain GHGs that can be emitted by installations covered by the system.Companies receive or purchase emission allowances,which they can trade if they reduce emissions below their cap.o Relevance to Carbon Management:ETS encourages companies to reduce emissions cost-effectively,as it incentivises investment in cleaner technologies or carbon offsetting.Carbon Border Adjustment Mechanism(using EU CBAM as an example)o EU CBAM:A policy to prevent carbon leakage by imposing a carbon cost on imports from countries with less stringent climate policies.It aims to ensure a level playing field for EU industries and encourage global carbon pricing.o Relevance to Carbon Management:CBAM pushes companies to consider the carbon intensity of their global supply chains,encouraging both domestic and international companies to reduce emissions.Science Based Targets initiative(SBTi)o Objective:An internal initiative that drives companies to set ambitious targets to reduce GHG emissions in line with the latest climate science.o Relevance to Carbon Management:SBTi provides a framework for companies to align their emissions reduction efforts with the Paris Agreements goals,ensuring that carbon management strategies are science-based and contribute to global climate efforts.General Carbon Management Guidebook Chapter 2:Mysteries and Key Questions 21 In conclusion,these standards and systems provide a robust framework for SMEs to manage,quantify,report,and reduce their carbon emissions.Adhering to these standards can help companies achieve compliance,gain competitive advantages,and contribute to global efforts to combat climate change.This guidebook will delve into how SMEs can implement these standards effectively in their operations.General Carbon Management Guidebook Chapter 3:Strategic Recommendations 22 Chapter 3:Strategic Recommendations for Top Management 5.1 Keys to Carbon Management:A Summary of Chapter 2 Navigating Carbon Management for HKMEs:Standards and Compliance:Carbon management involves adhering to various standards like ISO 9001,ISO 14001,ISO 50001,ISO 14064,ISO 14067,and others.These standards provide a structured approach for quantifying,reporting,and reducing emissions,ensuring that your carbon management efforts are credible and transparent.Verification and Credibility:Verification involves assessing the accuracy of GHG data to ensure that your carbon management efforts are credible and reliable.Its about confirming that the emissions data you report is accurate,complete,and consistent with recognised standards like ISO 14064-1.Megatrends:Carbon compliance and pricing mechanisms are on the rise,driven by environmental awareness,regulatory pressures like ETS and CBAM,global agreements,and investor and consumer demands.SMEs need to anticipate these trends and prepare for compliance to maintain market access and competitiveness.Implementation Tips for Top Management and Departments:Integration:Integrate carbon management into existing management systems.For example,quality management(ISO 9001)can be adapted to include carbon metrics,ensuring that carbon reduction becomes part of the continuous improvement process.Cross-Departmental Collaboration:Carbon management should not be siloed.Engage various departments including operations,procurement,product development,and marketing,to ensure a holistic approach.For instance,procurement can focus on sourcing low-carbon materials,while marketing can communicate your sustainability efforts effectively.Training and Awareness:Educate staff on the importance of carbon management.Use practical examples to illustrate how their daily activities impact carbon emissions,encouraging them to contribute to reduction efforts.General Carbon Management Guidebook Chapter 3:Strategic Recommendations 23 Data Management:Establish robust data collection systems to track emissions accurately.This might involve implementing software solutions or working with external consultants to ensure data integrity.Engagement with Stakeholders:Regularly communicate your carbon management strategy,progress,and achievements to stakeholders,including employees,suppliers,customers,investors,and regulators,to build trust and credibility.5.2 Common Biases in Carbon or Sustainability Related Decision-Making When forming carbon management strategies,top management often encounters biases that can skew decision-making:Short-termism:Focusing on immediate financial returns rather than long-term sustainability benefits.Example:A company decides against investing in energy-efficient lighting for their warehouses because the initial investment is high,despite the long-term savings in energy costs and reduced carbon emissions.Overconfidence Bias:Believing that current efforts are sufficient or that future regulations will be less stringent than anticipated.Example:A management team believes that their current emissions reduction efforts are already best in class and dismisses the need for further improvements,despite evidence that competitors are making more significant strides.Confirmation Bias:Seeking information that confirms existing beliefs or strategies while ignoring data that contradicts them.Example:A companys leadership team seeks out research that supports their current approach to carbon compliance with minimum resources deployed,ignoring intelligences that suggest disruptive policy changes have been on the way.Risk Aversion:Being overly cautious about investing in new technologies or practices due to perceived risks or uncertainties.Example:A business decides not to invest in renewable energy sources like solar panels due to concerns about the technologys reliability,even though the long-term benefits could significantly reduce their carbon emissions and energy costs.General Carbon Management Guidebook Chapter 3:Strategic Recommendations 24 Groupthink:Conforming to a consensus within the management team,leading to suboptimal decisions regarding sustainability.Example:During a management meeting,one executive suggests that their industry is not significantly impacted by carbon regulations,and everyone quickly agrees without critically evaluating the statement or exploring alternative views,leading to a consensus that might not reflect the reality of regulatory trends.Summary:To overcome these biases and make informed decisions,its essential for top management to consider appropriate criteria and follow a structured decision-making process.5.3 Criteria for Carbon Management Strategy and Examples Internal Criteria:Cost-Benefit Analysis:Sector Example(Chemical Products):Investing in electrified production equipment might have high initial costs but can lead to long-term savings in fuel costs and compliance with future emissions regulations.Operational Efficiency:Sector Example(Iron and Steel):Implementing energy-efficient machinery can reduce energy consumption,thereby reducing carbon emissions and operational costs.Corporate Culture and Employee Engagement:Sector Example(Electronic Products):Encouraging Reuse and Recycle initiatives to reduce waste can foster a culture of sustainability and employee involvement.In practice,these criteria are not evaluated in isolation but are woven together to form a cohesive strategic narrative.Consider a mid-sized manufacturing firm evaluating a significant capital investment:upgrading its primary production line to a newer,more energy-efficient model.The internal criteria immediately come into play.The finance department conducts a Cost-Benefit Analysis,weighing the high upfront cost against projected long-term savings from reduced energy consumption and lower maintenance needs.Simultaneously,the operations team assesses the impact on Operational Efficiency,noting that the new line could increase output by 15%while cutting energy use per unit by 30%.This decision also touches on Corporate Culture;the investment signals a commitment to modernity and sustainability,which can boost employee morale and attract new talent,though it may also require retraining programs,which must be factored into the overall plan.However,the decision cannot be made solely on internal metrics.The General Carbon Management Guidebook Chapter 3:Strategic Recommendations 25 External Criteria:Regulatory Compliance and Anticipation:Sector Example(Aluminium):Anticipating and preparing for carbon pricing mechanisms like ETS or CBAM can mitigate financial risks and compliance issues.Market Demand and Consumer Preferences:Sector Example(Fashion):Brands that adopt sustainable practices can attract eco-conscious consumers,potentially gaining market share.Investor and Stakeholder Expectations:Sector Example(Tech):Tech companies are increasingly expected to report on carbon emissions,influencing investment decisions and attracting ESG-focused investors.Innovation and Competitive Advantage:Sector Example(Food Products):Developing and promoting carbon-smart farming practices can not only reduce emissions but also position the company as a leader in sustainable food products.management team must also layer on the external criteria.They recognise that Regulatory Compliance is a moving target;while their current operations meet todays standards,anticipating stricter emissions caps or a potential carbon tax in the next five years makes the investment a prudent risk-mitigation strategy.Furthermore,their largest customersmajor international brandsare increasingly scrutinising their suppliers environmental performance as part of their own Scope 3 emissions targets.This direct Market Demand makes the upgrade a matter of maintaining key business relationships.This is reinforced by Investor and Stakeholder Expectations,as the firm seeks to attract capital from ESG-focused funds.By making this investment,the company not only improves its internal efficiency but also creates a powerful Innovation and Competitive Advantage,allowing it to market itself as a forward-thinking,sustainable partner in a crowded global marketplace.Ultimately,the most strategic initiatives are those that satisfy a blend of both internal and external criteria.The production line upgrade ceases to be just an operational or financial decision;it becomes a strategic imperative.It aligns cost-saving and efficiency goals with the external pressures of regulation,customer demands,and investor scrutiny.By systematically applying these criteria,top management can move beyond a simple cost-based analysis and make a holistic decision that strengthens the companys financial,operational,and market position for the long term.This comprehensive evaluation process is what transforms carbon management from a compliance burden into a strategic opportunity.General Carbon Management Guidebook Chapter 3:Strategic Recommendations 26 5.4 Decision-Making Process with Rating System To counter the common decision-making biases and navigate the complexities of carbon management,a formal,structured process is not just helpfulit is essential.Such a framework moves the organisation beyond reactive,ad-hoc initiatives and towards a proactive,coherent strategy.The following step-by-step process,which incorporates a rating system,is designed to provide this structure.It ensures that decisions are objective,transparent,and defensible,grounded in predefined criteria rather than intuition or internal politics.By systematically evaluating options and aligning them with both internal goals and external pressures,this process transforms broad strategic ambitions into a prioritised,actionable roadmap for resource allocation and implementation.Step-by-Step Process:1.Assessment:Conduct organisation and/or product-level carbon assessments using recognised standards.2.Criteria Definition:Define internal and external criteria based on the companys context,sector,and strategic goals.3.Strategic Options Identification:o Short-term actions to get quick wins in carbon reduction.o Medium-term plans to implement systemic changes.o Long-term approaches to shift towards low-carbon business models.4.Rating System:o Stakeholder Input:Use surveys or workshops to gather input from stakeholders on each criterion.o Specialist Judgments:Engage experts to rate initiatives based on technical feasibility,impact,and cost-effectiveness.o Scoring:Assign scores to each initiative based on:Feasibility(1-5)Impact on Emissions Reduction(1-5)Cost-Benefit Ratio(1-5)Alignment with Stakeholder Expectations(1-5)Regulatory Compliance(1-5)Innovation Potential(1-5)General Carbon Management Guidebook Chapter 3:Strategic Recommendations 27 5.Prioritisation:Rank initiatives based on their total score,ensuring a balance between different criteria.6.Resource Allocation:Allocate resources according to the prioritised initiatives,considering financial,human,and technological needs.7.Monitoring and Reporting:Establish mechanisms for ongoing monitoring and transparent reporting of progress.8.Continuous Improvement:Regularly review and update strategies based on new data,technology,and regulatory changes.9.Stakeholder Communication:Develop a communication plan to keep stakeholders informed about your carbon management strategy,progress,and impacts.By following this structured decision-making process with a rating system,SMEs can make more informed,balanced,and forward-looking decisions regarding carbon management,reducing the impact of biases and ensuring a strategic approach that aligns with both internal goals and external expectations.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 28 Chapter 4:Organisation Level Carbon Monitoring,Reporting and Verification Carbon emissions Monitoring,Reporting and Verification(MRV)at the organisational level is essential for companies to understand and manage their impact on the environment,comply with emerging regulations,and meet stakeholder expectations.This chapter provides a structured approach to carbon quantification,following the logic and content of ISO 14064-1,with additional guidance from the GHG Protocol for Scope 3 emissions.5.1 Establishing Management Commitment and Organisational Setup Management Meeting:Purpose:To discuss the significance of carbon management within the organisation,establish clear objectives,and gain top managements commitment.o Agenda:Review of current environmental impact and regulatory landscape.Discussion on the benefits of carbon management(e.g.,cost savings,regulatory compliance,competitive advantage,brand enhancement).Setting strategic goals for carbon reduction.Commitment to resource allocation and support from leadership.Commitment:Ensure that the top management:o Understands the necessity of carbon management.o Commits to integrating carbon management into the companys strategy.o Agrees to allocate necessary resources(financial,human,technological)for carbon quantification and reduction efforts.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 29 Carbon Management Team:Team Formation:o Composition:Include members from various departments such as production,R&D,supply chain/procurement,finance,marketing,and sustainability/ESG/EHS,ensuring a holistic approach to carbon management.o Roles:Carbon Management Coordinator:Oversees the entire carbon management process.Data Collectors:Responsible for gathering and organising emissions data.Reporting Officer:Prepares reports and ensures transparency in carbon reporting.Sustainability Champions:Act as ambassadors for sustainability within their departments.Roles and Responsibilities:Clearly define the responsibilities of each team member to ensure accountability and efficiency in executing carbon management strategies.Integration into Organisational Structure:Policy Development:o Develop or revise the companys environmental policy to explicitly include carbon management objectives,aligning it with ISO 14001 if applicable.o Incorporate carbon management into the companys broader sustainability strategy.Communication Strategy:o Internal Communication:Ensure that all employees understand the companys commitment to carbon management.Use internal channels like newsletters,intranet,and meetings to disseminate information.o Training and Awareness:Conduct training sessions to educate staff on carbon management practices,their roles,and how they can contribute to the companys goals.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 30 Incentives and Recognition:o Establish programs to recognise and reward departments or individuals who contribute significantly to carbon reduction efforts,fostering a culture of sustainability.Monitoring and Review:o Set up regular review meetings to assess progress against carbon reduction targets,allowing for adjustments in strategy or resource allocation.By establishing a strong management commitment and setting up a dedicated organisational structure for carbon management,SMEs can ensure that their efforts are not only initiated but also sustained and integrated into the fabric of the organisation.This foundational step is crucial for successful carbon quantification,reporting,and reduction activities.5.2 Setting the Organisational Boundaries There are two primary methods for setting organisational boundaries for carbon emissions:Operational Control and Financial Control.These methods help define which emissions should be included in a companys carbon inventory,ensuring a clear and consistent approach to carbon quantification.Operational Control:Definition:Emissions are accounted for if the company has the authority to introduce and implement its operating policies at the facility or operation.Example:A manufacturing company might own and operate its production lines,warehouses,and company vehicles,making these operations under its control.Financial Control:Definition:Emissions are accounted for if the company has the financial power to direct the operating policies of an operation with a view to gaining economic benefits from its activities.Example:A company that fully owns a subsidiary company would account for 100%of the emissions from that subsidiary.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 31 Steps to Set Organisational Boundaries:1.Identify Operations:List all operations,facilities,and activities that fall under the companys control or ownership.2.Choose Consolidation Approach:Decide on either:o Operational Control:Include all emissions from operations where the company has control.o Financial Control:Include emissions from operations where the company has financial control.3.Document Justification:Provide rationale for the chosen boundaries:o Common Rationale for Choosing Operational Control:Chosen because it aligns with how the company manages its operations,ensuring all emissions from activities under the companys direct influence are accounted for.o Common Rationale for Choosing Financial Control:Selected to reflect the companys financial interests,particularly useful for companies with complex ownership structures or joint ventures.Remark:A company can choose either Operational Control or Financial Control for a particular report,but not both simultaneously.For transparency and consistency,once a method is chosen,it should be applied consistently over time unless there are significant changes in the companys structure or operations.By setting clear organisational boundaries,SMEs can accurately quantify their carbon emissions,ensuring that their carbon management efforts are comprehensive,transparent,and aligned with standards like ISO 14064-1.This step is fundamental in establishing a baseline from which carbon reduction strategies can be developed and measured.5.3 Identifying GHG Emissions Sources Quantifying carbon emissions involves identifying and categorising all sources of greenhouse gas(GHG)emissions associated with the organisations operations.Here are the key scopes of emissions:Direct Emissions(Scope 1 Emissions):Definition:Direct GHG emissions from sources that are owned or controlled by the company.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 32 Examples:o Stationary Combustion:Emissions from burning fuels in boilers,furnaces,or turbines for heating,cooling,or electricity generation.o Mobile Combustion:Emissions from company-owned or controlled vehicles(e.g.,cars,trucks,forklifts).o Fugitive Emissions:Leaks from equipment like refrigerants,natural gas,or industrial gases.o Process Emissions:Emissions from chemical reactions or physical processes within the companys operations(e.g.,cement production,chemical manufacturing).o Direct emissions from Land Use,Land-Use Change and Forestry(LULUCF):emissions arising from a change in land-use category or internal land-management practices that reduce carbon stocks in carbon pools(including living biomass,soil organic carbon,etc.)or emit NO,as well as the associated CO releases(with alternative quantification methodologies selectable over a 20-year time horizon).Indirect Emissions from Uses of Imported Energy(Scope 2 Emissions):Definition:Indirect GHG emissions from uses of purchased/imported electricity,heat,or steam.Examples:o Electricity Purchases/Imported:Emissions associated with the generation of electricity bought from the grid.o Heat and Steam Purchases/Imported:Emissions from external sources providing heat or steam to the company.Other Indirect Emissions(Scope 3 Emissions):Definition:Other indirect emissions that occur in the value chain of the company,including both upstream and downstream activities.Categories(as per GHG Protocol):o Purchased Goods and Services:Emissions from the production of products and services purchased by the company.o Capital Goods:Emissions associated with the production of capital goods like machinery and equipment.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 33 o Fuel and Energy Related Activities:Upstream emissions from extraction,production,and transportation of fuels and energy.o Upstream Transportation and Distribution:Emissions from transportation and distribution of purchased products.o Waste Generated in Operations:Emissions from the disposal and treatment of waste generated by the companys operations.o Business Travel:Emissions from employee travel for business purposes.o Employee Commuting:Emissions from employees commuting to and from work.o Upstream Leased Assets:Emissions from leased assets not included in Scope 1 or 2.o Downstream Transportation and Distribution:Emissions from transportation and distribution of sold products.o Processing of Sold Products:Emissions from processing of products by third parties.o Use of Sold Products:Emissions from the use phase of sold products.o End-of-Life Treatment of Sold Products:Emissions from disposal or recycling of sold products.o Downstream Leased Assets:Emissions from assets leased to other entities.o Franchises:Emissions from franchise operations.o Investments:Emissions from investments not included in Scope 1 or 2.Steps to Identify Emissions Sources:1.Operation Review:Conduct a review/audit exercise on all company operations to identify potential emission sources.2.Data Collection:Gather data on fuel usage,energy consumption,travel,waste generation,and product lifecycle.3.Categorisation:Classify each source into the appropriate scope(1,2,or 3)based on control and ownership.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 34 4.Prioritisation:Identify which sources contribute most significantly to the companys carbon emissions for focused reduction efforts.5.Documentation:Keep detailed records of emissions sources,including descriptions,quantities,and GHG types.By thoroughly identifying and categorising GHG emissions sources,companies can establish a comprehensive baseline for their carbon inventory,which is crucial for developing effective carbon reduction strategies and for transparent reporting in line with standards like ISO 14064-1 and the GHG Protocol.5.4 Collecting Data for Emissions Quantification Accurate data collection is the cornerstone of effective carbon quantification.Heres how companies can approach this critical step:Data Sources and Collection Methods:Scope 1 Emissions(Direct Emissions):Utility Bills*:o Electricity Generation:If a manufacturing company generates its own electricity(e.g.,through diesel generators),utility bills or meter readings will provide data on fuel consumption for this activity.o Natural Gas:For heating or as a raw material,natural gas consumption can be tracked through utility bills.Fuel Receipts*:o Fuel for Vehicles:Collect receipts for fuel used in company-owned vehicles or machinery used in manufacturing processes.o Stationary Combustion:Records of fuel purchases for boilers,furnaces,or any combustion equipment not linked to utility bills.*In practice,companies typically retain bills,invoices,and on-site meter readings(including online system data).When multiple record types coexist,meter readings(i.e.actual usage data)should be taken as authoritative,since billing or invoicing periods may not align exactly with actual usage periods,leading to discrepancies.Furthermore,cross-checking meter readings against bill/invoice data can further verify accuracy and consistency.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 35 Direct Link:If the company has a direct link to an energy supplier(like a gas pipeline),meter readings or contractual agreements can provide precise data on energy consumption.Fugitive Emissions:o Refrigerants:Track the purchase and disposal records of refrigerants used in cooling systems or air conditioning units to estimate fugitive emissions.Process Emissions:o Manufacturing Processes:Monitor and record emissions from specific processes like cement production,chemical reactions,or metal smelting.Scope 2 Emissions(Indirect Emissions from Imported Energy):Electricity Purchases:o Utility Bills:Collect electricity bills to quantify emissions associated with the purchased electricity.o Power Purchase Agreements(PPA):If the company has a PPA for renewable energy,emissions can be calculated based on the energy provided under the agreement,often resulting in lower or zero emissions.Heat and Steam Purchases:o Contracts and Invoices:Data from contracts or invoices with external providers of heat or steam will be necessary to calculate associated emissions.Scope 3 Emissions(Other Indirect Emissions):Please refer to Section 4.5 which specifies details of Scope 3 Emissions and data collection.Steps for Data Collection:1.Define Data Needs:Determine what data is required for each emissions source identified in the previous step.2.Establish Data Collection Protocols:o Standardise Units:Ensure all data is collected in consistent units(e.g.,kWh for electricity,litres for fuel).General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 36 o Frequency:Decide how often data should be collected(e.g.,monthly,quarterly,annually).o Responsibility:Assign responsibilities for data collection to specific individuals or teams.3.Implement Data Collection Systems:o Automated Systems:Use software or tools to automatically collect data from meters,sensors,or utility providers.o Manual Data Entry:Implement a system for manual data entry where necessary,ensuring accuracy through double-checking or verification processes.o Integration:Integrate data collection into existing business processes or ERP systems for efficiency.4.Quality Assurance:o Accuracy:Verify the accuracy of collected data through spot checks or third-party validation.o Completeness:Ensure all relevant emissions sources are captured and no significant data is missing.o Consistency:Use consistent methodologies over time to allow for comparable data year on year.5.Data Storage and Management:o Database:Store data in a secure,accessible database that can be updated and queried easily.o Data Privacy:Ensure compliance with data protection regulations when handling personal or sensitive information.6.Engagement with Stakeholders:o Suppliers:Engage with suppliers to collect upstream emissions data.o Employees:Encourage employees to provide accurate data for commuting and business travel.o Customers:If applicable,gather data on product use to estimate downstream emissions.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 37 Data Quality and Accuracy:Primary vs.Secondary Data:Use primary data(directly measured or collected)where possible,as its generally more accurate than secondary data(estimated or from databases).Uncertainty Management:Acknowledge and document potential sources of uncertainty in data collection to inform future improvements.By following these steps,companies can ensure that the data collected for carbon quantification is comprehensive,accurate,and usable for effective emissions management.This data will serve as the foundation for calculating emissions,setting reduction targets,and reporting progress transparently.5.5 Managing Scope 3 Emissions Categorisation of Scope 3 Emissions:Scope 3 emissions,also known as value chain emissions,encompass all indirect emissions not covered in Scope 2.They are divided into 15 categories as per the GHG Protocol:1.Purchased Goods and Services:Description:Emissions from the production of products or services purchased by the company.Example:A furniture manufacturer would account for emissions from the production of wood,fabric,and other materials it buys.2.Capital Goods:Description:Emissions associated with the production of capital goods like machinery,vehicles,and buildings.Example:The emissions from manufacturing a new production line or purchasing a fleet of delivery trucks.3.Fuel-and Energy-Related Activities Not Included in Scope 1 or 2:Description:Emissions from the extraction,production,and transportation of fuels and energy purchased and used by the company,not already covered in Scope 1 or 2.Example:Upstream emissions from coal mining used to generate the electricity the company buys from the grid.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 38 4.Upstream Transportation and Distribution:Description:Emissions from transportation and distribution of purchased products from suppliers to the company.Example:Emissions from trucks delivering raw materials to a factory or from shipping goods via freight.5.Waste Generated in Operations:Description:Emissions from the disposal and treatment of waste generated by the companys operations.Example:Emissions from landfill decomposition or incineration of waste produced during manufacturing.6.Business Travel:Description:Emissions from employee travel for business purposes.Example:Emissions from accommodation,flights,train journeys,or car rentals for meetings,conferences,or site visits.7.Employee Commuting:Description:Emissions from employees commuting to and from work.Example:Emissions from employees driving personal vehicles or using public transport to get to the office.8.Upstream Leased Assets:Description:Emissions from leased assets not included in Scope 1 or 2,like leased vehicles or equipment.Example:Emissions from a leased office space where the company does not own the building but controls its operations.9.Downstream Transportation and Distribution:Description:Emissions from transportation and distribution of sold products from the company to the customer.Example:Emissions from delivery trucks or ships transporting the companys products to retailers or end-users.10.Processing of Sold Products:Description:Emissions from further processing of intermediate products sold by the company.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 39 Example:A steel manufacturer would account for emissions from customers who process the steel into final products.11.Use of Sold Products:Description:Emissions from the use of products by end-users.Example:Emissions from vehicles using gasoline.12.End-of-Life Treatment of Sold Products:Description:Emissions from disposal or recycling of products sold by the company.Example:Emissions from landfills where electronic products are disposed of or from the recycling process of packaging materials.13.Downstream Leased Assets:Description:Emissions from assets leased to other entities.Example:Emissions from a building or equipment the company leases out to another business.14.Franchises:Description:Emissions from operations of franchises not included in Scope 1 or 2.Example:Emissions from a fast-food franchisees operations if the company is the franchisor.15.Investments:Description:Emissions from investments not included in Scope 1 or 2,such as equity investments in other companies.Example:Emissions from companies in which the company has a financial interest but not operational control.Each category represents a different part of the companys value chain where emissions can occur,from the extraction of raw materials to the end-of-life treatment of sold products.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 40 Data Challenges:Complexity:Scope 3 emissions involve a broad range of activities,making data collection complex and time-consuming.Lack of Direct Control:companies often have less control over Scope 3 emissions sources compared to Scope 1 and 2,complicating data acquisition.Data Availability:Suppliers and customers might not have or be willing to share emissions data,leading to gaps in the inventory.Estimation:For some categories,companies must rely on industry averages,proxies,or estimates,which can introduce uncertainty.Scope:Determining the boundaries of what constitutes relevant Scope 3 emissions can be challenging.Variability:Emissions from Scope 3 activities can vary significantly over time due to changes in supplier practices,consumer behaviour,or product lifecycle.Engaging with Suppliers and Customers:Supplier Engagement:o Data Request:Establish clear communication channels to request emissions data from suppliers.o Supplier Development:Work with suppliers to improve their carbon accounting practices,possibly through training or incentives.o Contractual Agreements:Include environmental performance clauses in supplier contracts to encourage reduction efforts.Customer Engagement:o Product Information:Provide customers with information on how to use products in an environmentally friendly manner to reduce emissions during the use phase.o Product Design:Design products with end-of-life treatment in mind to minimise emissions from disposal or recycling.o Marketing:Use marketing to promote sustainability and encourage customers to make greener choices.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 41 Supply Chain Collaboration:o Joint Initiatives:Collaborate with supply chain partners on sustainability projects or industry-wide initiatives.o Transparency:Foster transparency by sharing your companys emissions reduction goals and progress,encouraging others to follow suit.Internal Communication:o Training:Educate employees on the importance of Scope 3 emissions and how their actions can influence them.o Incentives:Implement internal programs that incentivise employees to reduce emissions in their daily activities or travel.External Support:o Consultancy:Engage with carbon management consultants or use industry tools to help quantify and manage Scope 3 emissions.By categorising Scope 3 emissions,addressing data challenges,and engaging with the supply chain,SMEs can better manage these indirect emissions,contributing to a more comprehensive approach to carbon reduction.Differences and Recommendations for Data Collection Between Scope 3 and Scopes 1&2 Compared with the carbon-emissions accounting methodologies for Scopes 1 and 2,Scope 3 presents significant differences and challenges:1.Scope 1 focuses on direct GHG emissions from sources owned or controlled by the company(e.g.,on-site combustion of fossil fuels in boilers or furnaces).2.Scope 2 covers indirect emissions from purchased energy(e.g.,electricity,steam,heat or cooling),typically quantified via wellestablished emission-factor methods applied to utility bills or meter data.By contrast,Scope 3s boundary is much broader,encompassing all other indirect emissions throughout the companys value chainboth upstream(e.g.,rawmaterial extraction,inbound transportation)and downstream(e.g.,product distribution,use-phase impacts,end-of-life treatment).Because Scope 3 involves multiple actors and long,complex supply chains,obtaining primary activity data is extremely difficult.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 42 Logistics example:o You must track fuel types and consumption for each transport leg.o You must allocate emissions across different modes(road,rail,air)and various carriers.o A more efficient alternative is to collect shipment tonne-kilometres(tkm)and apply standardised emission factors in a calculation model to estimate total COe.Data-system gaps:o Traditional supply-chain platforms often record only ship-from/ship-to locations,lacking critical fields for transport distance and cargo weightso logistics emissions cannot be accurately quantified.o Employee commuting and business-travel emissions are likewise hard to capture without a systematic data-collection mechanism.Recommendations to Enhance Scope 3 Data Collection 1.Integrate Scope 3 fields into existing enterprise systems:o In your HR or time-and-attendance system,record each employees commuting mode and distance.Combine this with annual commuting days to estimate individual COe using published emission factors(e.g.,DEFRA,EPA).o In your supply-chain management system,add mandatory fields for transport distance(km)and cargo weight(tonnes)on every shipment record.2.Adopt standardised calculation models:o Use the collected tkm and mode-specific emission factors(kg COe/tkm)to derive transport emissions via a consistent,auditable methodology.3.Build a value-chain-wide data-collection framework:o Engage key suppliers and logistics providers to secure primary activity data(fuel use,mileage).o Leverage IoT telematics or transportation-management-system(TMS)integrations to automate data feeds.Only by establishing a granular,end-to-end data-collection system can organisations reliably quantify and manage Scope 3 emissions,thus enabling robust GHG reporting and targeted mitigation across the full value chain.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 43 5.6 Calculating Emissions Once the data has been collected,the next step is to calculate the carbon emissions associated with each source.Here is a structured approach to emissions calculation:Emissions Calculation Methodology:1.Identify Activity Data:Use the collected data to determine the amount of activity that produces emissions.This might include:o Volume of fuel consumed(e.g.,litres of gasoline,cubic meters of natural gas).o Electricity usage in kWh.o Distance travelled by company vehicles in kilometres.o Weight of waste generated or disposed of.o Others.2.Select Emission Factors:Emission factors are coefficients that represent the average amount of GHG emissions released per unit of activity.More details will be provided at the latter part of this section.3.Apply the Calculation Formula:o Emissions=Activity Data x Emission Factor o For example:Scope 1:If a company uses 1,000 litres of gasoline in its fleet,and the emission factor for gasoline combustion is 2.3 kg COe/litre,then emissions would be 1,000 x 2.3=2,300 kg COe.Scope 2:If the company consumes 100,000 kWh of electricity from the grid,and the emission factor for the grid electricity is 0.5 kg COe/kWh,then emissions would be 100,000 x 0.5=50,000 kg COe.4.Account for GHG Types:Different GHGs have different global warming potentials(GWP).Common GHGs include:o CO (Carbon Dioxide)-GWP of 1*o CH (Methane)-GWP of 25*o N O(Nitrous Oxide)-GWP of 298*General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 44 o F-Gases(e.g.,HFCs,PFCs)-Varying GWP,often significantly higher than CO Convert all GHG emissions to CO equivalents(COe)using the respective GWP.*Note:The GWP values mentioned here are based on the Fourth Assessment Report(AR4)by the IPCC,which are commonly used under some reporting standards and protocols(such as EU ETS and EU CBAM).However,the latest values from the Sixth Assessment Report(AR6)provide updated GWPs that reflect the most recent scientific understanding of the climate impact of different greenhouse gases.These updated values might differ,potentially affecting the CO equivalents used in emissions calculations.Companies should be aware of these changes and consider transitioning to AR6 values for future reporting to ensure alignment with the latest scientific consensus on climate change impacts.5.Summarise Emissions:o Calculate emissions for each source and scope separately.o Aggregate emissions to get total Scope 1,Scope 2,and Scope 3 emissions.6.Consider Uncertainty:o Acknowledge and document potential sources of uncertainty in the calculation process,such as variability in emission factors or inaccuracies in activity data.Emissions Factors:Finding Emission Factor Sources:National Inventories:Utilise national environmental agencies or other offices for country-specific emission factors.If national inventories do not provide factors for a specific emission source,companies can consider the other options.IPCC Guidelines:Access the IPCC Emission Factor Database for a wide range of global factors.Industry Associations:Look for industry-specific databases or reports from associations like the World Business Council for Sustainable Development(WBCSD)or sector-specific initiatives.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 45 Governmental and Non-Governmental Organisations:Use resources from organisations like the GHG Protocol,which provide factors for different sectors and activities.Utility Providers:Contact local electricity and gas providers for specific emission factors.Choosing the Right Emission Factor:Relevance:Select factors that are most relevant to your operations,location,and the specific fuels or energy sources used.Specificity:Opt for factors that are as specific as possible(e.g.,regional vs.national,or type of fuel used in your machinery).Consistency:Use emission factors from the same source or methodology over time to ensure comparability in your emissions reporting.Verification:Choose factors that are peer-reviewed or verified by reputable organisations or scientific bodies.Scope:Ensure the factor covers all relevant GHGs for your operations(CO,CH,NO,and F-gases).Regulatory Compliance:Use factors that align with mandatory reporting requirements or standards like ISO 14064-1.Maintaining Up-to-Date Emission Factors:Regular Updates:Check for updates from the sources you use annually or as recommended by the source.Subscription:Subscribe to newsletters or updates from organisations providing emission factors.Scientific Literature:Keep an eye on scientific publications for new research on emission factors.Database Maintenance:If using a software tool,ensure the tool automatically updates emission factors or provides an update notification service.Documentation:Document when and why youve changed emission factors,including the transition from AR4 to AR6 values if applicable.Training:Train your team on the importance of using current emission factors and how to access and apply them correctly.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 46 Stakeholder Engagement:Collaborate with industry peers or join working groups focused on carbon accounting to stay informed about best practices and updates in emission factors.Reporting and Documentation:Document the methodology,emission factors used,and any assumptions made during the calculation process.This documentation is crucial for transparency and verification.By following this methodology,companies can accurately quantify their carbon emissions,providing a solid foundation for setting reduction targets,tracking progress,and reporting in line with standards like ISO 14064-1.5.7 Uncertainty and Recalculation Accurate emissions reporting is not just about collecting data;its also about understanding the inherent uncertainties in the process and having a policy in place to address changes that can affect the comparability of emissions data over time.Here,we delve into methods for assessing uncertainty and establishing a recalculation policy to ensure that your companys carbon management remains robust,credible,and compliant with evolving standards and regulations.This section is particularly aimed at colleagues with a technical/engineering background who are responsible for maintaining the accuracy and reliability of the companys carbon emissions.Assessing Uncertainty:Quantitative Methods:o Monte Carlo Simulation:Use statistical methods like Monte Carlo simulations to quantify the uncertainty in emission calculations by running multiple scenarios with varying input data.Suppose your company has a fleet of delivery vehicles,and youre trying to calculate the emissions from fuel consumption.The fuel efficiency of the vehicles varies due to factors like age,maintenance,and driving conditions.With Monte Carlo simulation,you could simulate various scenarios with different fuel efficiencies,load weights,etc.,to understand the range of possible emissions outcomes.o Error Propagation:Calculate the combined uncertainty from individual sources using error propagation formulas,considering General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 47 the precision of measurement devices,variability in emission factors,and activity data.If youve measured the weight of waste your company produces with an accuracy of 3%,and the emission factor for waste decomposition has an uncertainty of 15%,error propagation would tell you that your total emissions calculation for waste might have an uncertainty of 15.3%(combining the errors).Qualitative Assessment:o Expert Judgment:Involve experts to assess the reliability of data sources and methodologies,identifying areas with potential high uncertainty.For example,your company uses a specialised industrial gas for manufacturing,and the emission factor for this gas isnt widely published.An expert might assess that,based on similar gases,theres a 20%uncertainty in the emission factor,which would affect the overall uncertainty of your emissions calculation.o Sensitivity Analysis:Analyse how changes in key input data or assumptions affect the overall emissions result to identify critical uncertainties.If your manufacturing companys emissions are significantly influenced by the efficiency of your production line,sensitivity analysis would show how much the emissions change if you increase or decrease the production efficiency by 5%,helping to pinpoint where the most significant uncertainties lie.Data Quality Indicators:o Accuracy:Assess the accuracy of the data by comparing it with known benchmarks or through third-party validation.o Completeness:Evaluate whether all relevant emissions sources are included and whether there are significant gaps in data.o Consistency:Ensure the methodology is consistently applied over time to allow for meaningful comparison.o Relevance:Determine if the data and methodologies used are relevant to the companys operations and the scope of the inventory.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 48 Uncertainty Documentation:o Document all sources of uncertainty,including assumptions,data gaps,and the quality of data sources.This documentation helps in understanding the reliability of the emissions inventory.Recalculation Policy:When to Recalculate:o Structural Changes:Significant changes in the company structure,like mergers,acquisitions,or divestitures,necessitate a recalculation to reflect the new organisational boundary.o Methodology Updates:If there are changes in the calculation methodology,such as switching from AR4 to AR6 GWP values or adopting new emission factors,recalculation ensures comparability.o Significant Errors:If errors or inaccuracies are discovered in the original calculations that significantly impact the baseline or reported emissions.o Regulatory Requirements:Compliance with new or updated regulations or standards that require recalculation for consistency.How to Recalculate:o Base Year Adjustment:Adjust the base year emissions to account for structural changes or methodological updates.o Intensity Metrics:Recalculate emissions intensity metrics to reflect changes in production levels,company size,or other normalisation factors.o Documentation:Clearly document the reasons for recalculation,the methodology used,and any changes in emission factors or data sources.o Consistency:Ensure that the recalculation method is applied consistently across all relevant years to maintain comparability.o Verification:Consider having the recalculated data verified by an independent third party for credibility.Communication:o Inform stakeholders about the recalculation,explaining why it was necessary and how it impacts the reported emissions.This General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 49 transparency helps maintain trust in the companys carbon management efforts.By addressing uncertainty and establishing a recalculation policy,companies can ensure their carbon emissions reporting remains accurate,comparable over time,and compliant with evolving standards and regulations.This process supports effective carbon management,allowing the company to track progress,set realistic targets,and demonstrate commitment to sustainability.5.8 Reporting and Verification Reporting Principles:When reporting GHG emissions,companies should adhere to the following key principles to ensure the integrity and usefulness of their carbon inventory:Relevance:Ensure the reported emissions are pertinent to the companys operations and its stakeholders,providing information that influences decisions or actions towards carbon management.Completeness:Report all relevant GHG emissions sources and activities within the chosen inventory boundary,avoiding any significant omissions.Consistency:Apply consistent methodologies,data collection procedures,and emission factors over time to allow for meaningful comparisons.If changes are made,they should be documented and justified.Transparency:Clearly document all assumptions,methodologies,exclusions,and uncertainties in the GHG inventory so that stakeholders can understand and evaluate the datas reliability.Accuracy:Strive for a high level of accuracy in the quantification of emissions,minimising uncertainties as far as practical,and providing enough detail for external verification.Verification:Verification is the process of reviewing and assessing the accuracy and completeness of your GHG emissions data.Heres how companies can approach verification:General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 50 Internal Verification:o Internal Audits:Conduct internal reviews or audits to check for errors,consistency,and adherence to the companys carbon management policies.o Data Validation:Use internal checks and balances,like cross-referencing data from different sources or departments,to validate the accuracy of emissions data.External Verification:o Third-Party Auditors:Engage independent third-party auditors to verify your GHG inventory.They provide an unbiased assessment of your carbon accounting practices.o Accreditation:Choose verification bodies accredited by recognised standards like ISO 14065,which outlines requirements for GHG validation and verification bodies.GHG Inventory Report:The structure and content of the GHG inventory report should be comprehensive,clear,and accessible:Executive Summary:o Provide an overview of the companys carbon emissions,key findings,and any significant changes from previous reports.Organisational Boundaries:o Define the organisational scope of the inventory,including which entities are included or excluded.Operational Boundaries:o Outline which emission sources and activities are included(e.g.,Scope 1,2,and relevant Scope 3 categories).Emissions Summary:o Present total GHG emissions by scope,broken down by emission source or activity.Include trends over time if applicable.Calculation Methodologies:o Detail the methods used for data collection,emission factor selection,and calculations,ensuring transparency.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 51 Data Quality and Uncertainty:o Discuss the quality of data,potential sources of uncertainty,and how these were addressed.Reduction Initiatives:o Highlight any carbon reduction strategies,projects,or initiatives undertaken by the company.Year-on-Year Changes:o Emissions Trends:Report the periodical(normally year-on-year)changes in emissions,showcasing the progress or regression in carbon management efforts.o Explanation of Changes:Importantly,explain why these changes occurred,whether due to operational changes,new initiatives,or external factors like changes in emission factors or company growth.Verification Statements:o Include statements from internal or external verifiers attesting to the accuracy and completeness of the GHG inventory.Appendices:o Provide additional data,methodologies,or supporting documentation as needed.By following these principles and processes,companies can produce credible GHG reports that not only fulfil compliance requirements but also build trust with stakeholders,support internal carbon management efforts,and contribute to the broader goal of reducing carbon emissions.Including year-on-year changes and their explanations provides a narrative of the companys carbon management journey,making the report more insightful and actionable.5.9 Continuous Improvements Continuous improvement is the cornerstone of effective carbon management,ensuring that emissions reduction efforts are not one-off projects but are fed into the organisations ongoing operations.This section will explore how companies can leverage their emissions data to set ambitious yet achievable reduction targets,and how to integrate these General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 52 targets into existing management systems to drive sustained progress towards lower carbon emissions.Setting Targets:Base Year:Establish a base year(normally based on the exercise of the previously mentioned steps),which serves as the reference point for all future emissions reduction targets.This year should be representative of normal operations,free from significant anomalies,and allows for accurate comparison of emissions over time.Benchmarking:Use your GHG inventory data to benchmark your companys emissions against industry standards,competitors,or your own historical performance.This helps in understanding where you stand and whats achievable.(Optional but Suggested)Science-Based Targets:Align your reduction goals with the latest climate science by adopting science-based targets(SBTi),which ensure your companys efforts contribute to the global efforts.SMART Targets:Set Specific,Measurable,Achievable,Relevant,and Time-bound targets.For instance:o Specific:Reduce Scope 1 emissions by 20%.o Measurable:By 1,000 tonnes COe per year.o Achievable:Based on feasible improvements in energy efficiency and fuel switching.o Relevant:Targets should align with your business strategy and contribute to overall sustainability goals.o Time-bound:To be achieved by the end of the next fiscal year.Data-Driven:Use the quantified emissions data to set realistic and informed targets.For example,if your data shows a significant portion of emissions comes from purchased goods,set targets for supplier engagement or material substitution.Long-Term Vision:While setting short-term targets,also consider a long-term vision for carbon neutrality or net-zero emissions to guide your companys future strategy.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 53 Management Systems:Integration into Business Operations:o Incorporate carbon management into your companys strategic planning,budgeting,and operational decision-making processes.This ensures that carbon reduction is not an add-on but part of the core business strategy.ISO 14001 and Other Standards:o Utilise environmental management systems like ISO 14001,which provides a framework for managing environmental impacts,including GHG emissions.Compliance with such standards can drive continuous improvement.o More details will be provided in the Chapter 5.Performance Metrics:o Establish key performance indicators(KPIs)related to carbon emissions and track them regularly.Metrics might include:Emissions per unit of product or revenue.Energy efficiency improvements.Percentage of renewable energy use.Regular Review and Reporting:o Set up a schedule for regular review of emissions data,progress against targets,and the effectiveness of reduction initiatives.Use this information to update your management systems and strategies.Employee Engagement:o Embed carbon reduction practices into employee responsibilities and incentivise or reward behaviours that contribute to lower emissions.Training and awareness programs can foster a culture of sustainability.Supplier and Customer Engagement:o Extend your management systems to include supplier performance in carbon management.Similarly,engage with customers to promote products or services that have lower carbon emissions.General Carbon Management Guidebook Chapter 4:Organisation Level Carbon MRV 54 Continuous Monitoring:o Implement systems for real-time or near-real-time monitoring of energy usage,waste generation,and other key factors influencing emissions to allow for timely interventions.Feedback Loops:o Establish feedback loops where lessons learned from carbon management initiatives are fed back into the system to refine processes,targets,and strategies.By setting informed targets based on a well-established base year and integrating carbon management into your companys operations,companies can ensure that continuous improvement in carbon reduction becomes part of the companys DNA.This approach not only helps in reducing emissions but also fosters innovation,cost savings,and improved market positioning in a world increasingly focused on sustainability.General Carbon Management Guidebook Chapter 5:Carbon Emissions Reduction 55 Chapter 5:Strategy and Operation for Carbon Emissions Reduction In this chapter,we delve into practical strategies and operational frameworks that companies can adopt to reduce their carbon emissions effectively.As organisations increasingly recognise their role in addressing climate change,the focus shifts from mere reporting to strategic carbon management.Here,we explore how companies can integrate carbon reduction into their core business practices via standards and measures that are inter-related with the carbon management efforts set out in Chapter 4,ensuring not only environmental sustainability but also long-term economic viability.5.1 Managing and Reducing Emissions in Operation:ISO 14001 Carbon Management as an Integral Part of Environmental Management System:Carbon management is a crucial component of an Environmental Management System(EMS),particularly when implementing ISO 14001:Overview of ISO 14001:ISO 14001 is the international standard for environmental management systems.While it encompasses various environmental impacts,carbon management can be integrated to address GHG emissions systematically.Integration with Carbon Management:Heres how companies can incorporate carbon reduction strategies into an ISO 14001 system:o Setting Environmental Objectives:Establish objectives that explicitly include carbon emissions reduction targets.These objectives should align with the companys commitment to sustainability and regulatory compliance.o Operational Control:Implement controls to minimise environmental impacts,including emissions:Energy Efficiency:Energy management is key,but operational controls should also include energy conservation practices.Waste Management:Minimise waste generation and manage waste disposal to reduce emissions from landfill and waste treatment.General Carbon Management Guidebook Chapter 5:Carbon Emissions Reduction 56 Design and Procurement:Incorporate environmental criteria into design processes and purchasing decisions to reduce the carbon footprint of materials and supplies.o Monitoring and Measurement:Regularly monitor and measure GHG emissions to track progress against set targets.Use tools like carbon emissions calculators or GHG inventories to quantify emissions.o Communication:Engage employees,suppliers,and stakeholders with clear communication about the companys carbon management efforts and performance.o Management Review:Include carbon performance in regular management reviews to assess the effectiveness of the EMS in reducing emissions and to adjust strategies as needed.Reducing Direct Emissions through EMS:For direct emissions(Scope 1)that are not energy-related,an EMS can implement specific measures:Process Emissions:o Process Optimisation:Optimise manufacturing processes to minimise emissions.For example,reducing the use of chemicals that release GHGs or improving process efficiency to reduce waste.o Technology Upgrades:Invest in cleaner technologies or modify existing processes to reduce or capture emissions.For instance,installing catalytic converters on combustion engines to reduce NOx emissions.Fugitive Emissions:o Leak Detection and Repair(LDAR)Programs:Establish a program to detect and repair leaks of refrigerants,solvents,and other GHGs.Regular inspections and maintenance schedules can significantly reduce these emissions.o Equipment Sealing:Upgrade or maintain equipment to ensure it is properly sealed,reducing the escape of GHGs.General Carbon Management Guidebook Chapter 5:Carbon Emissions Reduction 57 Refrigeration and Air Conditioning:o Refrigerant Management:Properly manage refrigerants by using low-GWP alternatives,ensuring no leaks,and following best practices for end-of-life management.o Efficient Cooling Systems:Choose energy-efficient cooling systems that also minimise refrigerant emissions.Wastewater Treatment:o Anaerobic Treatment:Use anaerobic digestion to treat wastewater,capturing methane for energy use or flaring it to reduce its climate impact.o Efficient Treatment Methods:Implement treatment methods that are less energy-intensive and produce fewer GHG emissions.Transport and Distribution:o Fleet Management:Optimise the fleet for lower emissions by using alternative fuels,improving vehicle maintenance for better fuel efficiency,or transitioning to electric or hybrid vehicles.o Route Optimisation:Use logistics software to plan routes that minimise fuel consumption and emissions.Agricultural Operations(if applicable):o Soil Management:Implement practices like no-till farming or cover cropping to reduce emissions from soil disturbance.o Livestock Management:Improve feed efficiency,manage manure to reduce methane emissions,and consider alternative protein sources.By integrating carbon management into the EMS framework of ISO 14001,companies can ensure that their environmental efforts directly contribute to reducing their carbon emissions.Furthermore,by targeting direct emissions sources through specific operational controls,companies can effectively manage and minimise their environmental impact beyond energy efficiency measures.General Carbon Management Guidebook Chapter 5:Carbon Emissions Reduction 58 5.2 Managing and Reducing Energy related Emissions in Operation:ISO 50001 According to the data by Climate Watch,the energy sector produces the most greenhouse gas emissions by far,accounting for 75.7%of all emissions worldwide,including 29.7%of all emissions from electricity and heat and 12.7%from manufacturing and construction.Energy management is critical for manufacturing companies seeking to reduce their carbon emissions,particularly through direct emissions(Scope 1)and indirect emissions(Scope 2):Direct Emissions(Scope 1):o Fossil Fuel Combustion:Energy management can directly reduce on-site Scope 1 emissions from fossil-fuel combustion(e.g.,in heating,cooling or mechanical-drive applications).Specifically,by improving energy-use efficiency,a company lowers its operational fossil-fuel consumption and thereby mitigates direct CO emissions from combustion at the source.o Fugitive Emissions:Energy management practices can also include maintenance schedules to prevent leaks from equipment,reducing fugitive emissions of GHGs like refrigerant and methane.Indirect Emissions(Scope 2):o Purchased Electricity:The efficiency of energy use within a company directly affects the amount of electricity purchased from the grid,which often comes from fossil fuels.Reducing electricity consumption through energy management lowers these indirect emissions.o Steam and Heat:If your production process involves steam or heat supplied by a utility,energy management can optimise usage,reducing the
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CBAM Guidebook for Hong Kong-funded Manufacturing Enterprises 1 1 Table of Contents Forewords.3 Chapter 1:Introduction.7 1.1.Purposes of this Guidebook:Providing a Practical and Actionable Roadmap.7 1.2.How this Guidebook was Compiled.8 1.3.Target Audience of this Guidebook.8 1.4.How You Should Read this Guidebook.8 Chapter 2:Understanding EU CBAM.10 2.1.Executive Summary.10 2.2.Key Components of CBAM.10 2.3.Common Misunderstandings about EU CBAM.22 Chapter 3:Cornerstones of Carbon Management.27 3.1.GHG Emissions:Defining Scope.28 3.2.Setting GHG Boundaries.29 3.3.Monitoring,Reporting and Verification.31 3.4.Implementation Strategies for Manufacturers.34 Chapter 4:Building a Carbon Management System for CBAM Compliance in the Iron and Steel Sector.35 Case Study 1:Company Alpha and Rick.37 Case Study 2:Company Bull and Mary.53 Chapter 5:Building a Carbon Management System for CBAM Compliance in the Aluminium Sector.69 Case Study 3:Company Canton and Mora.70 Chapter 6:Potential CBAM Scope Extension to Other Sectors Organic Chemicals and Polymers.85 6.1 Introduction:CBAM Evolution and Potential Scope Expansion.85 6.2 Organic Chemicals and Polymers:Why They May Be Included in CBAM.87 6.3 Preparing for CBAM:Steps for Manufacturers and Exporters in Asia-Pacific.90 2 Chapter 7:CBAM Formalities for Importers.94 7.1.Registration.94 7.2.Reporting.96 7.3.Certificate Surrender.99 7.4.Annual Reconciliation.100 Chapter 8:CBAM Data and Digitalisation for Manufacturers and Exporters(Installation Operators).103 8.1.Use of the EU Communication Template.103 8.2.Installation Information(i.e.,Tab A_InstData).104 8.3.Sources and Emissions(i.e.,Tab B_EmInst).106 8.4.Energy and Emissions(i.e.,Tab C_Emissions&Energy).108 8.5.Processes and Specific Embedded Emissions Calculation(i.e.,Tab D_Processes).109 8.6.Purchased Precursors.110 8.7.Other Tabs.110 8.8.Digitalisation Solutions for SMEs.111 Chapter 9:Guidebook Recap and Call to Action.113 List of CBAM-covered Goods and Greenhouse Gases.116 List of Abbreviations.121 References.124 Acknowledgements.126 EU CBAM Guidebook Forewords 3 Forewords At this pivotal moment in the global industrial restructuring,carbon management has transformed from an optional choice to a mandatory requirement for businesses.The emergence of carbon trading markets across the Asia-Pacific,alongside international green investment trends,is profoundly reshaping the competitive landscape for manufacturing.With decades industrial development and innovation capabilities across the Asia-Pacific,Hong Kong manufacturers are positioned to lead this transformative wave.The Federation of Hong Kong Industries(FHKI)has played a leading role in enabling SMEs to navigate environmental challenges.Since 2015,we have organised the annual BOCHK Corporate Low-Carbon Environmental Leadership Awards,recognising enterprises with outstanding sustainability performance.The programs steadily growing participation underscores the rising priority that industry now places on environmental issues and sustainable growth.In 2021,we established the Environmental,Social and Governance(ESG)Committee to further consolidate resources and strengthen industry engagement through seminars,workshops,and industry surveys,enhancing members understanding of carbon mitigation policies and strategies.Last year,through the Hong Kong Q-Mark Council,we launched the Hong Kong Q-Carbon Certification Scheme and Hong Kong Q-ESG Certification Scheme,providing professional accreditation services to assist SMEs in establishing robust carbon and ESG management systems.Hong Kongs manufacturers have built a comprehensive supply chain centred on Mainland China and extending across ASEAN.In this context,carbon management serves as a strategic opportunity to enhance corporate competitiveness in global markets.As a leading international financial and professional services centre,Hong Kong possesses a distinctive advantage in connecting global capital markets with green finance,providing comprehensive support for the green transformation of manufacturing.Through the synergy of finance,technology,and manufacturing,Hong Kong is poised to become a regional hub for green economic development,driving carbon neutrality across the Asia-Pacific.We recognise that SMEs often face difficulties in understanding and complying with complex carbon regulations,particularly when engaging with diverse international markets and rules.The two volumes of Carbon Management Guidelines seek to bridge that gap.By integrating international standards,CBAM regulations of EU,and the practical needs of Hong Kong manufacturers,these guides unpack complex requirements into clear,actionable steps,EU CBAM Guidebook Forewords 4 supplemented with case studies and industry insights.The guidelines provide SMEs with the knowledge and tools required to transition seamlessly to low-carbon operations,while maintaining operational efficiency and market competitiveness.We firmly believe that,in the context of the regional green transformation,establishing scientific and systematic carbon management practices early will gain a strategic advantage,reinforcing Hong Kong manufacturings position in the global value chains.FHKI remains steadfast in our commitment to walk alongside with industry,guiding manufacturers to navigate the challenges and capitalise on the opportunities of green transformation.Through these two Carbon Management Guidelines,we deliver decisive,actionable roadmap to Hong Kong manufacturers to not merely adapt,but thrive in the carbon-neutral erapowering forward our national carbon peaking and carbon neutrality ambitions,and driving transformative progress in global sustainable development.Anthony Lam FHKI Chairman August 2025 EU CBAM Guidebook Forewords 5 In the face of escalating climatic challenges,Environmental,Social and Governance(ESG)issues are garnering unprecedented attention.Regulatory pressure on ESG is accelerating worldwide,particularly with the European Unions(EU)recent implementation of the Carbon Border Adjustment Mechanism(CBAM)and the imposition of carbon tariffs.As a highly open and export-oriented economy,Hong Kong manufacturers will inevitably face carbon regulatory challenges,implying that carbon management must become an integral part of corporate decision-making and daily operations for SMEs.The Federation of Hong Kong Industries(FHKI)established the ESG Committee in 2021,dedicated to promoting industrial participation in achieving Hong Kongs goal of carbon neutrality by 2050.Through capacity building,knowledge exchange and ESG talent development,the Committee supports the industry sector in implementing effective ESG management.To strengthen the carbon management capabilities across the industry,and with the funding support from the Trade and Industry Departments Trade and Industrial Organisation Support Fund(TSF),we commissioned the Institute of Climate and Carbon Neutrality at the University of Hong Kong to launch the Project,“Facilitating ESG compliance in supply chain management for Hong Kong-invested manufacturing enterprises(HKMEs)”.The Project includes hosting the APAC ESG Summit for SMEs,compiling two Carbon Management Guidelines,and developing an online carbon management platform to help businesses take practical actions in response to increasingly stringent regulatory requirements.The two Carbon Management Guidelines are designed specifically for Hong Kong-funded manufacturing enterprises with production lines and supply chains operating across the Asia-Pacific region.Targeting the decision-makers,operational departments and green professionals,the Guidelines emphasise operability and practical application,providing the industry with step-by-step guidance.The Carbon Management Guidelines for Carbon Neutrality and Sustainable Development Targets of Hong Kong and Mainland China(“General Carbon Management Guidebook”)focus on internal corporate management,introducing international standards and systems,and detailing how to establish and optimise carbon management systems,accurately capture carbon data,and implement emission reduction actions.The Carbon Management Guidelines for EU Carbon Border Adjustment Mechanism(CBAM)Compliance(“EU CBAM Guidebook”),on the other hand,focuses on analysing compliance and practices for the two major CBAM in-scope industries,iron and steel,and aluminium,addressing emissions calculation,data collection,reporting,and verification processes,illustrated with case studies.These complementary guides the former emphasising internal capacity building and long-term transformation,the latter providing specialised analysis and strategies for CBAMoffer a systematic blueprint and action plan for the Hong Kong EU CBAM Guidebook Forewords 6 manufacturers to establish comprehensive ESG management systems under the increasingly stringent international environmental requirements.While tightening international carbon management trends present significant challenges for the manufacturing industry,early preparation for relevant regulations can transform these challenges into a competitive advantage.With these two Carbon Management Guidelines,FHKI aims to heighten industry vigilance toward international carbon regulations,empower enterprises to build robust carbon management systems ahead of competitors,transform regulatory challenges into strategic advantages and forge greener,more resilient supply chainsultimately reinforcing Hong Kong manufacturings competitive edge in global markets.Clara Chan Executive Deputy Chairman,FHKI Chairman,Steering Committee Facilitating ESG Compliance in Supply Chain Management for HKMEs Jude Chow Executive Deputy Chairman,FHKI Chairman,FHKI ESG Committee August 2025 EU CBAM Guidebook Chapter 1:Introduction 7 Chapter 1:Introduction 1.1.Purposes of this Guidebook:Providing a Practical and Actionable Roadmap As the world accelerates its transition towards a low-carbon economy,regulatory mechanisms such as the European Unions Carbon Border Adjustment Mechanism(CBAM)are reshaping global trade dynamics.CBAM serves as a tool to prevent carbon leakage by imposing a carbon price on imported goods equivalent to the cost borne by EU producers under the Emissions Trading System(ETS).This policy has significant implications for international supply chains,particularly for economies with high trade exposure to the EU.Companies with carbon-intensive products face increased compliance costs,which may require them to either adopt greener production methods.For Hong Kong Manufacturing Enterprises(HKMEs),especially small and medium-sized enterprises(SMEs),this guidebook serves as a practical resource to navigate CBAM requirements,offering insights,step-by-step guidance,and strategies to ensure a smooth transition into this new regulatory landscape.The guidebook is designed to achieve the following objectives:Support HKMEs in EU CBAM Compliance:The guidebook provides practical guidance to assist HKMEs in meeting the EU CBAM requirements.It addresses the necessary steps for compliance,such as calculating embedded carbon emissions,collecting accurate data,and adhering to reporting and verification standards.This will ensure HKMEs can continue exporting to the EU without disruption.Facilitate Carbon Management:Beyond compliance,the guidebook encourages HKMEs to establish or enhance their carbon management systems.These systems will enable companies to monitor,report,and reduce emissions effectively,aligning with global expectations for sustainable practices,and ultimately gaining a competitive edge by offering products with reduced carbon intensity.Contribute to Carbon Neutrality and Sustainable Development:By implementing the strategies outlined in this guidebook,HKMEs can contribute to broader carbon neutrality goals in Hong Kong,Mainland China,and the Asia-Pacific region.This aligns with international climate commitments,such as the Paris Agreement,and positions HKMEs as leaders in sustainable manufacturing.EU CBAM Guidebook Chapter 1:Introduction 8 1.2.How this Guidebook was Compiled This guidebook was developed through a comprehensive approach combining literature review on EU CBAM policies with conference calls with European Commission representatives.We conducted deep-dive interviews and site visits with representative Hong Kong enterprises in Iron and Steel,Aluminium,and Polymers sectors to understand their baseline capabilities and identify technical gaps,gathering feedback through meetings with diverse manufacturing companies and stakeholders from industry associations and academia.The case studies in this guidebook present fictional names but incorporate real examples from our interviews,accurately reflecting the challenges and opportunities facing CBAM in-scope enterprises.1.3.Target Audience of this Guidebook The primary audience for this guidebook includes:HKMEs in CBAM-In-Scope Sectors:Companies operating in sectors currently covered by CBAM,such as Iron and Steel and Aluminium,will find this guidebook essential for compliance and operational adjustments.HKMEs in Other Manufacturing Sectors:Enterprises in sectors expected to be included in the CBAM scope(e.g.,Polymers and Organic Chemicals by 2026)should begin preparing now.Additionally,manufacturers indirectly impacted through supply chain demands or customer requirements will benefit from this guide.The guidebook is also relevant to supply chain partners,industry associations,and stakeholders looking to understand how CBAM affects the manufacturing landscape and the broader implications for global trade.1.4.How You Should Read this Guidebook This comprehensive guidebook is structured to provide actionable insights and detailed guidance across its chapters.Below is an outline of its contents against the targeted audiences:EU CBAM Guidebook Chapter 1:Introduction 9 Strategy:Top Management Operation:Production,Supply Chain,R&D,IT Expertise:Carbon/Energy/EHS/ESG Specialist(s)Chapter 2:Understanding EU CBAM:Explains the CBAM framework,its objectives,and its relevance to HKMEs.This chapter also addresses common misconceptions and offers an FAQ section for clarity.Read at least Section 2.3 so that you have a general idea of CBAM and its implications.Read at least Section 2.3 so that you have a general idea of CBAM and its implications.Read all and be the champion within your organization.Chapter 3:Cornerstones of Carbon Management:Provides foundational knowledge about carbon emissions,global standards,and strategies for data collection and setting reduction goals.It emphasises the practical measures HKMEs can take to align with CBAM requirements.Skimming this chapter is suggested.Skimming this chapter is suggested.Chapters 46:Step-by-step Guidance and Case Study:Delve into sector-specific step-by-step guidance for industries such as Iron and Steel,Aluminium,with remarks on Organic Chemicals and Polymers which would likely be the next step extension of the CBAM scope.These chapters include best practices for data management,embedded emissions calculations,and compliance strategies.Skimming at least one of the case studies is suggested.Read at least one of the case studies.Case 1 addresses Bubble Approach and supply chain collaboration,Case 2 addresses Mass Balance Approach and Case 3 addresses PFC emissions and Allocation issue Chapter 7:CBAM Formalities and Data Points:Entail the data points and data requirements for CBAM formalities as well as the CBAM communication between importers and exporters.Quickly skimming Section 7.2 can be helpful to understand what CBAM means in practice.Supply Chain team should read this chapter.Production team and IT team may wish to read Section 7.2.Chapter 8:Lightweight Digital Solutions for Carbon Management in Manufacturing SMEs:Highlights the use of lightweight/low-cost digital tools to streamline carbon management processes and prepare for CBAM compliance.Skimming Section 8.3 is suggested IT team and Supply Chain team should read this Chapter EU CBAM Guidebook Chapter 2:Understanding EU CBAM 10 Chapter 2:Understanding EU CBAM 2.1.Executive Summary The European Unions Carbon Border Adjustment Mechanism(CBAM)is a regulatory framework designed to address carbon leakage and support the EUs ambitious climate goals.By applying a carbon price to certain high-emission imports,CBAM seeks to encourage the adoption of sustainable production practices globally while aligning with the EUs climate goals.For Hong Kong Manufacturing Enterprises(HKMEs),understanding CBAM is crucial to navigating its implications and preparing for its operational requirements.For importers,traders and manufacturers,CBAM introduces specific compliance requirements,such as emissions data reporting and verification.Chapter 2 outlines these obligations,helping HKMEs and other stakeholders prepare for the operational demands of CBAM.By focusing on accurate data collection and carbon accounting practices,businesses can ensure compliance and mitigate potential risks.Importantly,this chapter frames CBAM not simply as a regulatory challenge but as a driver for broader industry transformation.While the mechanism reflects the EUs approach to addressing carbon leakage,it also signals a global trend toward more stringent environmental standards.For Hong Kong,CBAM provides an impetus for strengthening carbon management capabilities,aligning with regional sustainability goals,and demonstrating leadership in the transition to low-carbon production.This chapter aims to equip HKMEs with the knowledge to engage with CBAM effectively,focusing on its operational aspects while considering the broader implications for Hong Kongs economic and environmental priorities.For readers seeking clarifications on the EU CBAM,Section 2.3 addresses common misunderstandings about the EU Carbon Border Adjustment Mechanism(CBAM)in a practical way.2.2.Key Components of CBAM The EU CBAM is a landmark policy developed to address carbon leakage and support the EUs climate ambitions by ensuring that imported goods reflect the carbon costs applied to domestic production under the EU Emissions Trading System(ETS).This section provides an overview of the key components of EU CBAM Guidebook Chapter 2:Understanding EU CBAM 11 CBAM and its phased implementation timeline,as well as the potential future expansion to additional sectors such as Polymers and Organic Chemicals.The CBAM framework is structured around several core elements that define its scope,requirements,and operational mechanisms:A.What:Scope of CBAM CBAM initially applies to specific carbon-intensive sectors,including Iron and Steel,Aluminium,Cement,Fertilisers,Electricity,and Hydrogen.These industries were selected based on their high carbon intensity and significant contribution to global emissions.Please note that the specific scope of the EU CBAM is defined using CN(Combined Nomenclature)codes,which are an EU-specific extension of the globally used Harmonised System(HS)codes.The first six digits of the CN code align with the HS classification,while the additional two digits provide greater specificity for EU purposes.Goods falling under CBAMs scope can be identified in Annex I to the CBAM Regulation,which lists the relevant CN codes.Importers should ensure that their products are classified correctly using these codes to determine whether they fall within the CBAM framework.The EU CBAM focuses on greenhouse gases(GHGs)directly associated with the production processes of in-scope goods.The primary GHG covered under CBAM is carbon dioxide(CO),which is the most significant contributor to emissions in the targeted sectors.However,depending on the production processes and products,other GHGs such as perfluorocarbons(PFCs)and nitrous oxide(N2O)should also fall within the scope.Below is an overview of the CBAM sectors and examples of the products against their CN codes(the first 4 or 6 digits)and the GHGs.Please refer to Annex I to the CBAM Regulation for details(also as appendix of this Guidebook).Iron and Steel(CO)o 7201:Pig iron in primary forms o 7207:Semi-finished products of iron or non-alloy steel(e.g.,billets,slabs,blooms)o 7308:Structures(excluding prefabricated buildings of heading 9406)and parts of structures(for example,bridges and bridge-sections,lock-gates,towers,lattice masts,roofs,roofing frameworks,doors and windows and their frames and thresholds for doors,shutters,balustrades,pillars and columns),of iron or steel;plates,rods,angles,shapes,sections,tubes and the like,prepared for use in structures,of iron or stee EU CBAM Guidebook Chapter 2:Understanding EU CBAM 12 o 7318:Screws,bolts,nuts,coach screws,screw hooks,rivets,cotters,cotter pins,washers(including spring washers)and similar articles,of iron or steel o 7326:Other articles of iron or steel Aluminium(CO and PFCs)o 7601:Unwrought aluminium(e.g.,ingots,slabs).o 7606:Aluminium plates,sheets,and strips.o 7610:Aluminium structures(excluding prefabricated buildings of heading 9406)and parts of structures(for example,bridges and bridge-sections,towers,lattice masts,roofs,roofing frameworks,doors and windows and their frames and thresholds for doors,balustrades,pillars and columns);aluminium plates,rods,profiles,tubes and the like,prepared for use in structures o 7616:Other articles of aluminium Cement(CO)o 2523 10:Cement clinkers o 2523 29:Other Portland cement o 2523 90:Other hydraulic cements Fertilisers(CO and N2O)o 3102:Mineral or chemical fertilisers,nitrogenous o 3105:Mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen,phosphorus and potassium;other fertilisers;except:3105 60 00 o 2804 10:Hydrogen Ammonia(CO)o 2814:Ammonia,anhydrous or in aqueous solution.Hydrogen(CO)o 2814:Ammonia,anhydrous or in aqueous solution.Electricity(CO)o 2716:Electrical energy The mechanism may expand to cover additional sectors,notably Polymers and Organic Chemicals,in the future.The European Commission shall present a report to the European Parliament and to the Council including an assessment on the possibility of the scope extension.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 13 B.What:Emission Sources under CBAM Under the EU CBAM framework,emission sources are categorised with a specific focus on the trade-related embedded emissions of imported goods,which differ from broader carbon management standards like ISO 14064-1.Below is a detailed description of the emission sources under CBAM:1.Direct Emissions Direct emissions refer to greenhouse gas(GHG)emissions that are generated during the production processes of CBAM-covered goods.These emissions sources include:On-Site Production Processes:Emissions produced directly at the installation during the manufacturing of goods,such as emissions from combustion and other processes for production.Heating and Cooling Production:Emissions from the generation of heating and cooling used in the production process,regardless of whether the heating or cooling is generated on-site or off-site.That said,if heating or cooling is produced outside the installation but is used in the production process,the resulting emissions are still counted as direct emissions.The common emission sources in question are imports of heat flows and waste gases,the category of which differs from that under 14064-1 or GHG Protocol(where imports of heat flows and waste gases are considered sources for indirect emissions).2.Indirect Emissions Indirect emissions are those associated with the consumption of electricity during the production of CBAM goods.The calculation of indirect emissions depends on the quantity of electricity used,the country of origin of the electricity,the generation source,and the associated emission factors.3.Embedded Emissions in Precursor Materials In addition to the direct and indirect emissions from the production process,CBAM also considers the embedded direct(and indirect emissions if applicable)of relevant precursor materials used in manufacturing.Note:During the transitional phase(until 31 December 2025),both direct and indirect emissions should be reported for all goods under CBAM.From 1 January 2026,while direct emissions should be declared for all CBAM-covered goods,the requirement to declare indirect emissions for certain sectors remains uncertain as of March 2025.Stakeholders EU CBAM Guidebook Chapter 2:Understanding EU CBAM 14 should stay informed about potential revisions to indirect emissions reporting requirements.It is suggested to keep track of the latest requirements.C.Who:Parties Involved in CBAM and Their Obligations The EU CBAM involves multiple parties,each with specific roles and obligations to ensure the system operates effectively.Below is a detailed breakdown of the key parties involved in CBAM(other than the authorities)and their respective obligations:Importers of In-Scope Products Who They Are:All importers of CBAM-covered goods should register as authorised CBAM declarants in the CBAM registry,established and maintained by the European Commission.Registration is mandatory to legally import CBAM-covered goods into the EU.Please note that companies established outside the EU(such as in Hong Kong)may act as importers in the EU and are subject to the same CBAM obligations as companies established within the EU.Obligations:1.Registration:Should register as an authorised CBAM declarant in the CBAM registry maintained by the European Commission to legally import CBAM-covered goods.2.Monitoring and Reporting:Submit quarterly reports that entails the volume of imported goods,the embedded emissions of CO/GHGs in these goods,based on emissions generated during their production,and whether any carbon price was paid for these emissions in the country of origin.This reporting obligation applies during the transitional phase of CBAM(from October 1,2023,to December 31,2025)when no certificates are required.During this phase,the reporting obligations are intended to familiarise importers with the system.3.CBAM Certificate Purchases:Starting from January 1,2026,importers will need to purchase and surrender CBAM certificates annually to cover the embedded emissions of their imported goods.The price of CBAM certificates will be based on the average auction price of EU ETS allowances during the relevant period,ensuring alignment with the EUs carbon pricing system.Adjustments will be made for any carbon price paid in the country of origin,provided EU CBAM Guidebook Chapter 2:Understanding EU CBAM 15 sufficient evidence is submitted and validated by the competent authorities.4.Compliance Obligations:By May 31st each year,importers should submit an annual CBAM declaration to the competent authority in their Member State and surrender the required number of CBAM certificates to cover the verified embedded emissions of the goods imported during the previous calendar year.5.Record-Keeping:Maintain records related to imports(e.g.,data on imported goods,emissions calculations,and surrendered certificates)for at least four years for verification and auditing purposes.6.Non-Compliance Consequences:Importers failing to meet obligations may face financial penalties for non-compliance,restrictions on imports or other trade-related consequences,potential obligations to surrender additional CBAM certificates or pay further penalties for underreporting embedded emissions.Exporters in Non-EU Countries Who They Are:Exporters are companies,facilities,or operators located in non-EU countries that produce goods covered by CBAM(e.g.,steel,cement,aluminium,fertilisers,hydrogen,or electricity)for export into the EU.Obligations:1.Provide Emissions Data:Exporters are expected to provide detailed and verifiable data on the embedded emissions of their products to the EU importer.If exporters fail to provide emissions data,the importer should rely on default values set by the regulation.These default values are typically based on the average carbon intensity of the products industry in the exporting country,which may be less favourable than actual emissions data.2.Disclose Carbon Pricing:Exporters should document and communicate any carbon price paid in the country of origin,such as:carbon taxes or costs under an emissions trading system(ETS)or similar mechanisms.3.Adopt Transparency:Exporters should ensure transparency in their production processes and emissions measurement to facilitate compliance for EU importers.Cooperation with verifiers and importers is essential to ensure accurate reporting and compliance with CBAM rules.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 16 Verifiers(Independent Accredited Entities)Who They Are:Verifiers are independent third-party entities accredited to verify the embedded emissions data provided by exporters and submitted by importers.According to Regulation(EU)2023/956,verifiers should be accredited by EU-based accrediting bodies,as defined in Regulation(EC)No 765/2008.Only accrediting bodies within the EU are authorised to determine who can act as accredited verifiers under CBAM.Verifiers operating in non-EU countries(e.g.,Asia-Pacific)should obtain accreditation from an EU-based accrediting body to perform CBAM-related verification activities.Obligations:1.Verification of Emissions Data:Verifiers should assess and verify the accuracy of embedded emissions data provided by exporters or operators at the installation level,and ensure the verification complies with CBAMs specific methodologies and standards,including those outlined in Annex VI of Regulation(EU)2023/956.Please note that installation visits are mandatory for verification unless specific criteria for waiving the visit are met(e.g.,if sufficient data is available remotely and the verifier determines no physical visit is necessary).2.Reporting:Verifiers should issue verification reports to the operators of installations(not directly to importers).These reports document the verified embedded emissions and are then used by the importers to fulfil their CBAM obligations.Importers submit this verified data to the competent authorities as part of their quarterly and annual declarations.D.When:Timeline for Implementation of the CBAM The EU CBAM adopts a phased approach to its implementation,providing businesses with a structured timeline to adapt:Transitional Phase(October 1,2023 December 31,2025):Quarterly Reporting Obligations:During this phase,importers of CBAM-covered goods are required to submit quarterly reports detailing the embedded greenhouse gas(GHG)emissions of their imports and any carbon prices paid in the country of origin.These reports should comply with the detailed reporting templates and methodologies outlined in Implementing Regulation(EU)2023/1773,which specifies the rules for calculating embedded emissions and ensuring accuracy in reporting.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 17 No Financial Obligations:Importers are not required to purchase CBAM certificates during this phase.The focus is on collecting accurate emissions data,building capacity,and allowing businesses and regulators to familiarise themselves with the reporting requirements and methodologies.Capacity Building and Fine-Tuning:This period is intended to allow for the refinement of the CBAM framework based on insights gained from the reporting data.It also provides an opportunity for stakeholders,including industries and enforcement authorities,to prepare for the full implementation phase.Full Implementation(Starting January 1,2026):Introduction of Financial Obligations:From 2026 onward,importers will be required to purchase and surrender CBAM certificates to cover the embedded emissions of their imported goods.The number of certificates corresponds to the verified emissions associated with the production of the imported goods.Alignment with EU ETS:The cost of CBAM certificates will reflect the prevailing carbon price under the EU Emissions Trading System(ETS),ensuring a level playing field between EU domestic producers and foreign suppliers.This prevents carbon leakage by internalising the cost of carbon emissions for imports,incentivising cleaner production processes globally.Verification and Compliance:Importers will need to ensure that the reported embedded emissions are verified by accredited entities,as stipulated in Regulation(EU)2023/956.Non-compliance with reporting or certificate purchase requirements could result in penalties.Future Sectoral Expansion and the Climate Club Concept(2026 and Beyond):Planned Expansion to New Sectors:The EU plans to expand CBAM coverage to include additional sectors such as polymers and organic chemicals.These industries are integral to global supply chains and are particularly significant for export-dependent economies.For non-EU producers,the inclusion of these EU CBAM Guidebook Chapter 2:Understanding EU CBAM 18 sectors will require further adjustments to meet the CBAMs reporting and compliance requirements,which could create additional administrative burdens and costs.Emerging Climate Club Dynamics:The CBAM framework reflects the EUs ambition to set a global standard for integrating carbon pricing into trade policies.By aligning the cost of CBAM certificates with the EU Emissions Trading System(ETS),the mechanism creates a de facto carbon pricing system for imports.The EU has signalled its openness to engage with trading partners on carbon pricing equivalence or mutual recognition mechanisms,framing this as part of a broader effort to encourage international cooperation on climate goals.However,this so-called climate club approach has sparked debate.Critics argue that CBAM could unintentionally penalise economies without comparable carbon pricing systems,particularly developing countries or regions with differing climate policies.While the EU considers CBAM a tool to foster global decarbonisation,concerns persist that it may impose additional barriers to trade and undermine principles of fair competition.E.How:CBAM Administration The CBAM framework imposes multiple obligations on importers(and exporters via the importers)to ensure compliance with its requirements.These obligations include registration,quarterly reporting,CBAM certificates,and annual filing and reconciliation.Each obligation involves specific actions and oversight from the European Commission,the CBAM registry,national authorities,and accredited verifiers.Below is a breakdown of importer obligations and the corresponding roles of these governing bodies:Registration of Importers National Authorities:Review and approve importer registration applications.Maintain a list of authorised importers who are entitled to participate in the CBAM system.CBAM Registry:Serve as the digital infrastructure where registered importers are recorded and managed.European Commission:Provide overarching guidance on registration procedures to ensure harmonisation across Member States.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 19 Quarterly Reporting on Embedded Emissions National Authorities:Receive and review quarterly reports submitted by importers.Validate the accuracy of embedded emissions data and the reporting templates used by importers.Accredited Verifiers:Independently verify the emissions data and compliance with calculation methodologies.Issue verification statements confirming the accuracy of the reported data.CBAM Registry:Serve as the platform where importers upload their quarterly reports and where national authorities can access these reports for validation.European Commission:Provide standardised templates and guidelines for quarterly reporting to ensure consistency across all Member States.Monitor aggregate data for compliance trends and evaluate the effectiveness of the CBAM framework.Purchasing and Holding CBAM Certificates National Authorities:Issue CBAM certificates to importers within their jurisdiction.Monitor the number of certificates purchased and ensure they align with the emissions data provided in quarterly reports.CBAM Registry:Track the issuance,purchase,and holding of CBAM certificates by registered importers in a centralised system.Provide transparency and facilitate monitoring by national authorities.European Commission:Set the price of CBAM certificates,which is calculated based on the average auction price of EU ETS allowances over a predefined period.Oversee the functioning of the CBAM registry to ensure uniformity and transparency across Member States.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 20 Annual Filing and Reconciliation National Authorities:Review and validate the annual declarations submitted by importers.Ensure that the number of surrendered CBAM certificates matches the verified emissions for the year.Take enforcement actions in cases of discrepancies or non-compliance.CBAM Registry:Record the submission of annual declarations and the surrendering of CBAM certificates by importers.Track certificate balances and ensure proper accounting for unused certificates.European Commission:Provide guidance to ensure consistency in annual filing and reconciliation processes across Member States.Monitor Member States enforcement of CBAM obligations to ensure compliance with EU regulations.Verification of Embedded Emissions Accredited Verifiers:Perform independent assessments of emissions data and ensure compliance with prescribed methodologies.Issue verification statements confirming the reliability of the reported emissions.National Authorities:Maintain oversight over the accreditation of verifiers and ensure their impartiality and competence.European Commission:Define the rules and standards for verifying emissions and accredit verifiers to ensure consistency across the EU.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 21 Penalties for Non-Compliance The CBAM framework includes strict enforcement measures to ensure compliance with its requirements.Penalties apply to importers who fail to meet their obligations,as outlined below:Failure to Surrender CBAM Certificates:Starting in 2026,importers should surrender the required number of CBAM certificates annually to cover the embedded emissions of their imports.If they fail to do so,they will incur a financial penalty equivalent to the EU ETS excess emissions penalty for that year.This amount may be significantly higher than the market price of CBAM certificates,ensuring that non-compliance is costlier than compliance.Inaccurate or False Reporting:Importers that submit inaccurate or falsified emissions data or fail to meet the verification requirements may face administrative fines.Repeated violations could result in additional enforcement measures,such as suspension of import rights for CBAM-covered goods.Fraudulent Activity and Deliberate Evasion:Fraudulent activities,such as misreporting embedded emissions or attempting to circumvent CBAM obligations,are subject to strict penalties.Member States are required to impose sanctions that are effective,proportionate,and dissuasive,which may include criminal penalties under national laws.Strategic Implications for Importers and Exporters The strict penalty regime under CBAM will have a profound impact on importers strategies,decision-making,and contractual arrangements with exporters.Importers face significant financial and operational risks if their CBAM obligations are not properly fulfilled,driving them to adopt more cautious and stringent measures when dealing with their supply chains.This includes:Increased Scrutiny on Exporters:Importers will require exporters to provide detailed,verified,and reliable data on the embedded emissions of their goods,as well as information on any carbon pricing paid in the country of origin.A failure by exporters to provide accurate and verified information could expose importers to penalties for non-compliance,pushing them to seek alternative suppliers or renegotiate contracts to include clauses ensuring full data transparency and accountability.Contractual Adjustments:EU CBAM Guidebook Chapter 2:Understanding EU CBAM 22 Importers are likely to include specific contractual provisions requiring exporters to provide emissions data verified by accredited third-party entities.Contracts may also include indemnity clauses to hold exporters accountable for any penalties or additional costs incurred because of inaccurate or incomplete emissions data.Supply Chain Reconfiguration:The risk of penalties may lead importers to reconfigure their supply chains,favouring exporters from jurisdictions with robust carbon accounting systems or recognised carbon pricing mechanisms.Exporters without adequate emissions tracking may find themselves at a competitive disadvantage in the EU market.For exporters,this highlights the importance of aligning with CBAM requirements by ensuring that all emissions data and documents are accurate,transparent,and verified by accredited entities.Providing reliable and verifiable data will not only strengthen relationships with importers but also help exporters maintain their competitive position in the EU market.Failure to do so could lead to strained relationships with key trading partners,lost business opportunities,or exclusion from the EU market altogether.2.3.Common Misunderstandings about EU CBAM This section aims to help Hong Kong Manufacturing Enterprises(HKMEs)gain a clearer understanding of the EU Carbon Border Adjustment Mechanism(CBAM)by addressing common misconceptions in a practical format.By highlighting and correcting these misunderstandings,HKMEs can approach CBAM compliance with accurate information and avoid potential pitfalls or missteps.1.CBAM Applies Only to Large-Scale Manufacturers?Many HKMEs mistakenly believe that CBAM only targets large-scale manufacturers.However,CBAM applies to all non-EU entities exporting in-scope goods to the EU,irrespective of their size or production volume.The scope of CBAM is determined by the type of products and sectors covered,such as iron and steel,cement,aluminium,fertilisers,hydrogen,and electricity,and not the size of the exporting business.2.CBAM Only Affects Certain Sectors?It is true that CBAM currently applies only to specific sectorsiron and steel,aluminium,cement,fertilisers,hydrogen,and electricitythat are at high risk of carbon leakage.However,the misconception lies in thinking this is static.CBAM EU CBAM Guidebook Chapter 2:Understanding EU CBAM 23 was designed with the flexibility to expand to additional goods and sectors over time.While no definitive expansion has been confirmed yet,businesses should stay informed as the EU may broaden the scope to include other carbon-intensive products,such as polymers or organic chemicals,after the transitional phase.3.CBAM Covers Only Simple Products,Upmost Streams in the Supply Chain?A common misunderstanding is that CBAM applies exclusively to simple products or only to the utmost streams in the supply chain.In reality,CBAM covers both simple goods and complex goods,depending on the embedded emissions and production processes involved.Simple Goods:Simple goods are products whose embedded emissions are based entirely on emissions from their own production processes.Input materials for simple goods are considered to have zero embedded emissions under the CBAM methodology.An example would be primary aluminium,where emissions are calculated solely for its production.*Complex Goods:CBAM also applies to complex goods,which are products made using precursor materials that are themselves CBAM goods.For complex goods,the embedded emissions include not only those from their production but also the emissions from the relevant precursors used in the manufacturing process.For instance,in the cement sector,cement clinker,a precursor material,is included in the calculation of embedded emissions for Portland cement.*Pursuant to Regulation(EU)2023/956,simple goods means goods produced in a production process requiring exclusively input materials(precursors)and fuels having zero embedded emissions whilst complex goods means goods other than simple goods.The definition in this Guidebook is an interpretation based on the regulation definition for easier understanding.This means that CBAM does not merely focus on the utmost streams of the supply chain or the final product.Instead,it accounts for emissions across multiple stages of production,particularly where precursor materials falling under CBAM are involved.4.Compliance is a One-Time Effort?A common misconception is that CBAM compliance is a one-time effort involving only a one-off annual audit.In reality,manufacturers will need to adopt a proactive and continuous approach to monitoring and maintaining carbon-related data and records.CBAM compliance is not limited to periodic audits but requires day-to-day management of emissions data to ensure accuracy and readiness for reporting obligations.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 24 Quarterly Reporting Requirements:During the transitional phase(20232025),importers are required to submit quarterly reports detailing the embedded emissions of their imported goods,calculated in alignment with CBAM methodologies.These reports should include accurate and up-to-date data,necessitating regular tracking and maintenance of carbon-related records throughout the year.Record-Keeping Obligations:Manufacturers should maintain complete and transparent records of all data relevant to determining embedded emissions,including supporting documents.These records should be kept for at least four years and be readily available for submission or review by EU authorities when necessary,emphasising the importance of ongoing documentation rather than one-time efforts.Verification and Updates:While annual reconciliation and verification of emissions data are required during the definitive phase starting in 2026,the CBAM framework stresses the need for continuous monitoring.Accurate day-to-day tracking ensures that any updates or corrections can be swiftly incorporated into quarterly reports,reducing the risk of discrepancies or penalties.Financial and Operational Impact:Relying on annual audits alone may result in outdated or incomplete data,which could lead to higher declared emissions or non-compliance penalties.By maintaining records daily,manufacturers can optimise their carbon accounting,minimise costs,and enhance their reputation for environmental accountability.In summary,CBAM compliance requires manufacturers to shift from a reactive,one-time audit approach to a proactive,daily management system for carbon-related data.This ongoing process not only ensures accurate reporting but also prepares businesses for the evolving requirements under CBAM.5.My Product Carbon Footprint Certificate Can Meet CBAM Requirements?There is a common misunderstanding that a Product Carbon Footprint(PCF)Certificate,based on ISO 14067 or Life-Cycle-Assessment(LCA)methodologies,can directly satisfy CBAM requirements.This misconception even exists among some so-called CBAM experts”.However,this is not the case.CBAM mandates specific emissions data at the installation level,calculated in line with CBAM methodologies,which are harmonised with the EU Emissions Trading System(ETS).These methodologies focus solely on emissions embedded in production(both direct and indirect),not the cradle-to-grave perspective of PCF or LCA approaches.Sole reliance on a PCF Certificate risks EU CBAM Guidebook Chapter 2:Understanding EU CBAM 25 non-compliance due to insufficient granularity or varying quantification methodology.As an observation,the use of emission factors from LCA databases often lead to a significant“over-estimate”of the embedded emissions compared to the emissions based on CBAM requirements.6.Reporting Embedded Emissions is Optional During the Transitional Period?Some HKMEs mistakenly believe that CBAM reporting requirements are optional until the definitive period begins in 2026.This is incorrect.As of 1 October 2023,reporting embedded emissions for in-scope goods is mandatory during the transitional phase.Importers should submit quarterly reports to the CBAM Transitional Registry,detailing emissions and carbon costs paid abroad.7.Default Values Can Be Used Without Providing Actual Data?The use of default values for emissions reporting under CBAM is allowed but subject to specific conditions and limitations:Transitional Period(until 30 June 2024):Default values can be used without quantitative limits if actual emissions data is unavailable,but importers should demonstrate reasonable efforts to retrieve actual data from operators.For subprocesses or input materials contributing less than 20%to the total embedded emissions of complex goods,estimated values(including default values)may be used.Definitive Period(from 2026):While default values remain an option,they are typically set higher than actual emissions due to a mark-up designed to maintain environmental integrity.This results in higher declared emissions and,consequently,higher carbon costs for importers.Default values,which often significantly exceed actual emissions,effectively increase the carbon cost for businesses,making imported goods less competitive.Furthermore,EU buyers may perceive the reliance on default values as a lack of environmental transparency or commitment,potentially leading to financial and reputational penalties in the form of reduced market attractiveness or strained business relationships.Therefore,businesses should implement robust systems to collect and report actual emissions data,verified at the installation level,to minimise costs and maintain market trust.EU CBAM Guidebook Chapter 2:Understanding EU CBAM 26 8.CBAM is Only About Direct Emissions?Some manufacturers believe CBAM focuses exclusively on direct emissions(e.g.,from on-site combustion).However,CBAM also considers indirect emissions,such as those from purchased electricity used in production.Furthermore,for certain products,emissions from precursors(input materials)should also be accounted for.Accurate reporting requires collaboration along the supply chain to collect data on emissions from upstream suppliers,underscoring the importance of strong partnerships.9.CBAM Penalties Are Minimal and Avoidable?Businesses may underestimate the consequences of CBAM non-compliance,assuming penalties are minor or negotiable.In reality,non-compliance can result in:Financial penalties,such as fines for failing to report or surrender CBAM certificates,which are calculated based on the EU ETS excess emissions penalty.Restricted access to the EU market,which could disrupt business operations.Significant reputational damage,as non-compliance with environmental regulations can harm relationships with EU partners and customers.HKMEs may wish to take proactive steps to fully understand and meet CBAM obligations to avoid these risks.10.CBAM is Just an EU Climate Policy,Not a Trade Policy Some stakeholders view CBAM purely as a climate policy aimed at reducing greenhouse gas emissions.While this is its primary objective,CBAM also functions as a trade policy.By mirroring the carbon costs EU producers face under the ETS,CBAM prevents carbon leakage and ensures a level playing field between EU and non-EU producers.For HKMEs,understanding CBAMs dual role in climate and trade strategies is crucial to aligning their export plans with EU requirements.EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 27 Chapter 3:Cornerstones of Carbon Management The purpose of this chapter is to emphasise the critical role of carbon management as the foundation for achieving compliance with the EU Carbon Border Adjustment Mechanism(CBAM),advancing toward carbon neutrality,and aligning with the broader sustainable development goals(SDGs)for HKMEs.Carbon management is not merely a compliance exercise;it is a strategic approach that enables businesses to measure,monitor,and reduce their carbon footprint while maintaining competitiveness in markets with stringent climate policies like CBAM.For HKMEs,effective carbon management can unlock opportunities for more sustainable operations,foster stronger relationships with international trade partners,and prepare them for evolving global expectations on climate action.It is important to distinguish between general carbon management principles and the specific requirements of CBAM.While carbon management focuses on long-term strategies for reducing greenhouse gas(GHG)emissions across the entire value chain,CBAM compliance canters on precise reporting and accounting for direct and indirect emissions embedded in exported goods,as mandated by EU regulatory frameworks.By addressing these distinctions:The other guidebook,Carbon Management Guidelines for Carbon Neutrality and Sustainable Development Targets of Hong Kong and Mainland China(“General Carbon Management Guidebook”),offers comprehensive information on carbon management applicable to HKMEs across all sectors,including those not currently covered under CBAM.This Guidebook also provides a practical,step-by-step guide for implementing a carbon management system.This chapter serves as a condensed version of the General Carbon Management Guidebook by outlining the cornerstones of carbon management.Chapters 4 and 5 delve into the technical details of implementing a carbon management system specifically designed to comply with CBAM requirements.Given the relatively higher impacts of CBAM on the Iron and Steel and Aluminium sectors,this guidebook uses these two industries as key examples to illustrate the application of CBAM requirements in carbon management.EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 28 3.1.GHG Emissions:Defining Scope Accurate and transparent greenhouse gas(GHG)accounting begins with defining the scope and boundaries of emissions.For manufacturing companies,this process involves identifying all emissions sources across operations and the value chain while adhering to globally recognised frameworks such as the GHG Protocol and ISO 14064-1.These frameworks ensure that emissions are categorised,measured,and reported consistently,providing a foundation for effective carbon management.Carbon emissions refer to the total amount of greenhouse gases(GHGs)released into the atmosphere,typically measured in CO-equivalent(CO e).This metric accounts for the varying global warming potentials(GWPs)of different gases,such as carbon dioxide(CO),methane(CH4),nitrous oxide(N2O),hydrofluorocarbons(HFCs),perfluorocarbons(PFCs),sulphur hexafluoride(SF6)and nitrogen trifluoride(NF3).In the context of manufacturing processes,carbon emissions are categorised based on their sources,as outlined by ISO 14064-1 and the GHG Protocol Corporate Standard:1.Direct Emissions(Scope 1):o Emissions from sources directly owned or controlled by the company.For manufacturers,these primarily include:Combustion of fossil fuels in stationary equipment(e.g.,boilers,furnaces,or generators).Combustion of fossil fuels in mobile sources(e.g.,motor vehicles,trains).Process-related emissions from chemical reactions(e.g.,cement production or steel manufacturing).Fugitive emissions from leaks in industrial equipment(e.g.,refrigerants or other gases).2.Indirect Emissions from Energy Use(Scope 2):o Emissions associated with the generation of purchased/imported energy,such as electricity,steam,heating,or cooling.While the company does not directly produce these emissions,they occur at the energy generation source.3.Other Indirect Emissions(Scope 3):o All other indirect emissions that occur across a companys value chain.These include:EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 29 Upstream activities like the production of purchased goods,transportation,and waste management.Downstream activities like the use of sold products and their end-of-life treatment.Terminology Note:GHG Protocols vs.ISO 14064-1 While the GHG Protocol uses the terms Scope 1,Scope 2,and Scope 3,ISO 14064-1 refers to the same emissions categories as direct emissions,energy indirect emissions,and other indirect emissions,respectively.The concepts are fundamentally aligned,but organisations should be aware of the terminology differences when applying these standards.You may refer to the Carbon Management Guidelines for Carbon Neutrality and Sustainable Development Targets for Hong Kong and Mainland China for more information about these standards.3.2.Setting GHG Boundaries Defining boundaries is essential for determining which emissions sources are included in a companys GHG inventory.There are two types of boundaries to establish:organisational boundaries and operational boundaries.Organisational Boundaries Organisational boundaries determine which operations or facilities are included in a companys GHG inventory.Companies should decide how to consolidate emissions from their various business units and operations.The GHG Protocol and ISO 14064-1 offer two primary approaches for setting organisational boundaries:1.Equity Share Approach:o Under this approach,a company accounts for GHG emissions according to its share of equity in an operation.o For example,if a company owns 30%of a joint venture,it would include 30%of the joint ventures emissions in its inventory.o This approach reflects the companys economic stake in the operation.2.Control Approach:o The control approach consolidates GHG emissions based on operational control or financial control:EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 30 Operational Control:A company accounts for 100%of the emissions from operations over which it has the authority to implement operational policies.Financial Control:A company accounts for 100%of the emissions from operations it controls financially(i.e.,has the majority financial interest).o Please note that the control approach is most commonly used because it aligns with decision-making authority over emissions reduction activities.Manufacturing companies should select the approach that best aligns with their business operations and reporting objectives.Once chosen,this approach should be applied consistently over time to ensure comparability.Operational Boundaries Operational boundaries define which emissions sources within the organisational boundary are included in the GHG inventory.These boundaries are structured around the three scopes of emissions as set out above(i.e.,Scope 1,Scope 2 and Scope 3).Setting Boundaries for Manufacturing Companies Manufacturing companies face unique challenges when setting GHG boundaries due to the complexity of their operations and supply chains.Key considerations include:1.Multi-Tiered Supply Chains:o A significant portion of a manufacturing companys emissions often occurs upstream in Scope 3,such as emissions from raw material extraction or processing.o Companies should engage with suppliers to collect reliable data and include these emissions in their inventory.2.Global/Regional Operations:o Manufacturing companies often operate across multiple jurisdictions,each with varying regulatory requirements for emissions reporting.o A consistent boundary-setting approach ensures that the companys inventory can be compared across regions and comply with local regulations.EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 31 3.Joint Ventures and Partnerships:o Companies in joint ventures or partnerships should decide how to account for emissions based on their chosen consolidation approach(e.g.,equity share vs.control).4.CBAM Considerations:o Under the Carbon Border Adjustment Mechanism(CBAM),emissions boundaries are particularly important for calculating embedded emissions in exported goods.o Manufacturers exporting CBAM-covered products to the EU should ensure their boundaries align with CBAMs requirements to accurately report embedded emissions.Note:CBAM and Supply Chain Emissions The embedded emissions calculated under CBAM include the direct(Scope 1)and indirect(Scope 2)emissions from the production process.For complex goods,the calculation must also include the embedded emissions of any precursor materials that are themselves covered by the CBAM regulation.This rule transforms supply chain management by making emissions traceability a critical component of supplier qualification and regulatory compliance.As CBAM evolves,it may require reporting and pricing of embedded emissions for complex goods like machinery and electronics,increasing the importance of robust Scope 3 data.Companies exporting to the EU may wish to work closely with upstream suppliers to improve emissions data collection and reporting.To comply with CBAM and other emerging regulations,manufacturers may consider integrating Scope 3 emissions into their carbon management strategies,focus on supply chain transparency,and adopt methodologies aligned with ISO 14064-1 and GHG Protocol standards.3.3.Monitoring,Reporting and Verification For manufacturing companies,the foundation of effective carbon management lies in accurate measurement and transparent reporting of GHG emissions.ISO 14064-1 provides a globally recognised framework for quantifying and reporting organisational GHG emissions,offering manufacturers a clear,standardised approach that aligns with regulatory and market expectations.While the GHG Protocol is widely used in voluntary reporting,this section focuses on ISO EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 32 14064-1,as it is more familiar to manufacturing industries and easier for them to integrate it into broader quality,environmental and sustainability management systems including but not limited to ISO 9001,ISO 14001,ISO 50001.For easy reference purpose,the terms Scope 1,Scope 2 and Scope 3 should still be used.Principles of ISO 14064-1 Reporting ISO 14064-1 establishes a set of principles to ensure that GHG emissions reporting is accurate,transparent,and credible.These principles are crucial for manufacturers seeking to maintain trust with stakeholders,align with regulations,and achieve sustainability goals.Relevance:Ensure the GHG inventory appropriately reflects the organisations emissions and supports decision-making.Completeness:Account for all relevant GHG emissions within the defined organisational and operational boundaries.Consistency:Use consistent methodologies for data collection,calculation,and reporting to enable year-over-year comparisons.Accuracy:Use high-quality data and minimise uncertainties in emissions calculations.Transparency:Provide clear and verifiable information,including assumptions,methodologies,and data sources.Data Collection and Calculation For manufacturers,ISO 14064-1 emphasises the importance of robust data collection systems and accurate emissions calculations.The following steps outline the process:1.Identify Emissions Sources:o Compile a comprehensive list of emissions sources across Scopes 1,2,and 3.o Focus on key emitting activities such as energy consumption,raw material use,and industrial processes.2.Collect High-Quality Data:o For Scope 1 and 2 emissions,gather direct measurement data(e.g.,fuel consumption,energy usage)wherever possible.o For Scope 3 emissions,engage with suppliers to obtain primary data or use industry averages and emission factors when primary data is unavailable.EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 33 3.Apply Emission Factors:o Use verified emission factors to convert activity data(e.g.,fuel use,electricity consumption)into CO-equivalent emissions.o Manufacturers should use region-specific emission factors for purchased electricity to reflect variations in grid carbon intensity.4.Document Assumptions and Uncertainties:o Clearly document any assumptions used in emissions calculations,particularly for Scope 3 emissions where data availability may be limited.5.Verification and Validation:o Seek third-party verification to ensure the accuracy and credibility of the GHG inventory.Reporting Requirements ISO 14064-1 specifies the minimum requirements for GHG emissions reporting,ensuring transparency and consistency across organisations.Manufacturers should include the following elements in their GHG reports:1.Organisational and Operational Boundaries:o Clearly define the boundaries used to calculate emissions,including the scope(1,2,and 3)and the approach to consolidation(e.g.,operational control).2.Emissions Data:o Provide a breakdown of total emissions by scope,including key sources contributing to each scope.3.Methodologies and Assumptions:o Explain the methodologies used for data collection,calculation,and emission factor application.4.Emissions Trends:o Highlight changes in emissions compared to previous reporting periods,explaining any significant variations.5.Reduction Initiatives:o Report on emissions reduction efforts and progress toward specific targets,if applicable.EU CBAM Guidebook Chapter 3:Cornerstones of Carbon Management 34 3.4.Implementation Strategies for Manufacturers For manufacturing companies,implementing effective carbon management involves building robust data collection systems,identifying emissions reduction opportunities,and integrating carbon management into the overall business strategy.By following ISO 14064-1 principles,manufacturers can ensure accurate measurement,actionable reductions,and alignment with both regulatory and market requirements.Data Collection and Management Accurate data collection is the foundation of ISO 14064-1 compliance and effective carbon management.Manufacturers should prioritise high-quality data to create credible emissions inventories.Emissions Reduction and Strategic Integration Once emissions data is collected,manufacturers should focus on actionable reduction opportunities and integrate carbon management into their overall business strategy.Reduction Opportunities by Scope:Scope 1(Direct Emissions):Improve energy efficiency,switch to lower-carbon fuels,optimise processes,and manage fugitive emissions(e.g.,refrigerants).Scope 2(Energy Indirect Emissions):Transition to renewable energy sources and enhance energy efficiency across operations.Scope 3(Value Chain Emissions):Engage suppliers,adopt sustainable procurement practices,optimise logistics,and redesign products for lower carbon intensity.Strategic Integration:Set Measurable Targets:Establish science-based emissions reduction targets aligned with global climate goals.Link to Financial Outcomes:Quantify cost savings from energy efficiency and reduced regulatory risks,integrating carbon performance into investment decisions.Embed in Business Culture:Secure leadership support,train employees,and foster innovation around sustainability practices.Leverage Competitive Advantage:Highlight carbon management achievements in marketing and product development to attract customers and investors.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 35 Chapter 4:Building a Carbon Management System for CBAM Compliance in the Iron and Steel Sector For businesses in the iron and steel sector,particularly small and medium enterprises(SMEs),navigating the complexities of CBAM can seem daunting,especially when carbon management is not yet an integral part of their operational processes.This chapter focuses exclusively on the technical details of carbon management for CBAM purposes.It provides an accessible yet thorough guide to implementing a Carbon Management System(CMS),enabling companies to identify,monitor,and manage carbon emissions throughout their production processes.The chapter deliberately excludes formal CBAM compliance procedures,such as reporting obligations or legal formalities,which will be covered in Chapter 7.Instead,the emphasis here is on equipping businesses with fundamental tools and strategies to measure and manage emissions as a prerequisite for CBAM compliance.To make the content relatable and actionable,we employ two case studies representing real-world scenarios in the iron and steel sector.Both case studies address the full spectrum of carbon management,offering step-by-step guidance for diverse business models:1.Company Alpha:A downstream manufacturing SME that procures steel,performing final processing steps like reheating,remelting,casting,forging,coating,and cutting.This case study highlights how downstream manufacturers can establish robust carbon monitoring systems for their own processes while managing the significant portion of emissions derived from their imported precursors.2.Company Bull:An upstream steel production company that produces steel,selling them to companies like Alpha.This advanced case study delves into the full spectrum of carbon management,from defining system boundaries to applying methodologies like the Mass Balance approach for emissions tracking.Through these case studies,readers will gain a hands-on understanding of setting up a carbon management system tailored to their operational needs.The chapter ensures that even SMEs with little to no prior experience in carbon management can follow the steps and implement practical solutions.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 36 This chapter is an essential guide for carbon engineers,operational managers,and business owners who seek to proactively manage their carbon footprint in the context of CBAM.It prepares readers to address emissions challenges,leverage opportunities for operational efficiency,and align their business practices with the sustainability targets.Here below are the key terms for this chapter(as well as Chapter 5),in addition to those which have already been covered in Chapter 2 and Chapter 3(as well as the General Carbon Management Guidebook).It is suggested that the readers walk them through as a first step.Dont worry about these terms if you do not fully understand them;you may refer to these terms when navigating the case studies and the technical discussions.Aggregated Goods Category:Group of CBAM goods with different CN codes but similar CBAM characteristics;the said CBAM characteristics means the same or similar production route,system boundaries(inputs,outputs and corresponding emissions),emission monitoring and relevant precursors.Bubble Approach:A single,joint system boundary for a production process within an installation,which is applied when a production facility produces both a complex product and its precursor,and the precursor is entirely used to manufacture the complex product.By treating the precursor and the final product as part of a single production system,the embedded emissions are calculated collectively rather than separately,simplifying the overall emissions accounting process.Calculation-based Methodology:The approach involves calculating emissions based on the quantities of fuels and relevant materials consumed during production.It consists of two methods:Standard Method and Mass Balance Method.CN Code:Combined Nomenclature codes which are an EU-specific extension of the globally used Harmonised System(HS)codes primarily for customs purposes.The first six digits of the CN codes align with the HS classification,while the additional two digits provide greater specificity for EU purposes.Complex Goods:Goods produced from other CBAM goods(either simple or other complex goods).Please refer to the definition of Simple Goods.Mass Balance Method:The approach that tracks the carbon flow by accounting for the carbon quantities in all fuels and input materials,as well as in the output materials.It is commonly applied in complex production systems to monitor emissions more accurately.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 37 Measurement-based Methodology:The approach where emissions are determined by directly measuring the concentration of GHGs in the flue gas,as well as the flow rate of the flue gas for each emission source.Production Process:Chemical or physical processes carried out in parts of an installation to produce goods under an aggregated goods category and its specified system boundaries.Production Route:Specific technology used in a production process to produce goods Simple Goods:Goods produced from fuels and raw materials considered to have zero embedded emissions under CBAM.Standard Method:The approach that involves calculating emissions based on the quantities of fuels and input materials consumed during production multiplied by specific calculation factors such as the net calorific value of the fuel and the emission factor.Case Study 1:Company Alpha and Rick Overview Rick,the Energy Engineer at Company Alpha,was tasked with setting up a Carbon Management System(CMS)to meet CBAM requirements in the last quarter of 2023.This effort required inter-departmental collaboration and a strategic approach to manage emissions across direct,indirect,and precursor-related sources.The case study follows his journey,addressing challenges like identifying emission sources,selecting appropriate methodologies,obtaining emissions data from suppliers,and ensuring compliance with CBAM regulations.Step 1:Identifying Goods Subject to CBAM Rick began by consulting the supply chain team to determine which exported goods would fall under CBAMs scope.The team informed him that while they had detailed export records,they only used Chinese HS codes and did not have EU CN codes which were used by their customers in the EU.Rick explained that the HS(Harmonised System)codes are universal up to the first 6 digits and the iron and steel products(i.e.,Articles of Iron or Steel in the HS Code system)subject to CBAM are defined by the first 4 or 6 digits.This makes the Chinese HS codes compatible for identifying iron and steel products under CBAM.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 38 After clarifying this,Rick and the supply chain team cross-referenced their inventory of imported goods against the CBAM Annex I list using the HS codes.They found that all the products of the company would require emissions reporting under CBAM.This established the foundation for the subsequent steps in setting up the CMS.Step 2:Establishing System Boundaries A Team Effort Having identified the relevant goods,Rick moved on to defining the system boundaries for the CMS.This required:Collaboration with Production team:To map out direct emissions from manufacturing processes like heating furnaces.Input from Facilities Management team:To include electricity consumption and associated indirect emissions.Engagement with Supply Chain team:To assess embedded emissions in imported steel raw materials.This collaborative approach ensured all relevant emissions sources were captured within the CMS.This collaborative effort ensured that Company Alphas CMS covered all relevant emissions,including direct emissions from production,indirect emissions from electricity,and precursor-related emissions.Call-Out Box:CBAM Goods in the Iron and Steel Sector The iron and steel sector has a broad spectrum of products covered under CBAM.These include,but are not limited to:7308:Structures and parts of structures(e.g.,doorframes,window frames and shutters,prefabricated buildings of iron or steel).7310:Tanks and containers made of iron or steel.7318:Screws,bolts,nuts,and similar articles.7326:Other articles of iron or steel(e.g.,cast-iron parts).These categories encompass a wide range of goods with significant implications for many manufacturing enterprises in Asia Pacific.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 39 Step 3:Identifying Emission Sources Ricks Collaborative Approach Working with other departments,Rick identified:Direct emissions from fuel combustion in reheating and remelting processes.Indirect emissions tied to electricity usage across production lines.Please note that,depending on potential changes of the regulations,the CBAM scope for iron and steel products may be limited to direct emissions during the definite period.Indirect emissions were calculated in this case study because they were for reporting in transitional period.Embedded emissions in precursors,provided by suppliers or estimated using default values.After the supply chain team developed an understanding of embedded emissions in precursors,there were a few calls between Rick and the supply chain team and between Company Alpha and the supplier,Company Bull.The conversations revealed two critical challenges:1.Lack of Internal Data:The supply chain team acknowledged that they did not have records or data on the embedded emissions of the steel procured.This was due to a lack of monitoring and reporting requirements in their current supply chain processes.2.Suppliers Reluctance:Company Bull informed that:o They did not monitor or track embedded emissions data for their production processes.o Even if such data existed,it was considered commercially sensitive,and they were unwilling to share it with Company Alpha.This reflects broader confidentiality concerns in supply chains,where suppliers may hesitate to disclose operational data to downstream buyers.Step 4:Selecting Standard Method for Emission Quantification In this step,Rick worked on selecting appropriate quantification methods tailored to each emission source,ensuring that Company Alpha could accurately calculate emissions while complying with CBAM requirements.The quantification methods were applied separately to direct emissions,indirect emissions,and embedded emissions in precursors.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 40 Direct Emissions from Production Processes For emissions generated by on-site production activities,such as reheating furnaces and remelting operations,Rick decided to use the Standard Method.This method involves calculating emissions based on activity data(e.g.,fuel consumption)and applying emission factors.The formula is as follows:Emissions(tCOe)=Fuel Consumption Emission Factor Net Calorific Value*Data Source:Fuel consumption data was provided by the production team while emission factors and calorific values were drawn from the standard values set out in Commission Implementing Regulation(EU)2023/1773.Rationale:The Standard Method was chosen for its simplicity and alignment with available data,making it practical for Company Alphas operations as a starting point of the CMS.*The Oxidation Factor is set as 1,which is conservative assumption,to reduce monitoring efforts.Indirect Emissions from Electricity Usage For indirect emissions tied to electricity consumption,Rick used the following formula:Emissions(tCOe)=Electricity ConsumptionGrid Emission Factor Data Source:The facilities management team provided monthly electricity usage data specifically for the production.The grid emission factor was based on the IEA value*.Rationale:This approach ensures that indirect emissions are calculated in a straightforward,transparent manner,adhering to CBAM requirements.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 41 Call-Out Box:Decision Tree for Determining Grid Emission Factors for CBAM Compliance The determination of grid emission factors under CBAM compliance follows a structured process to ensure accuracy,flexibility,and alignment with regulatory guidelines.The steps below outline the decision-making flow:Step 1:Is the electricity sourced via a direct technical link or a Power Purchase Agreement(PPA)?If Yes:Determine whether the actual emission factor(EF)is verified.oIf Verified:Use the verified actual emission factor for the electricity-generating source.This is permissible under CBAM regulations when the electricity is directly supplied to the installation or governed by a valid PPA.oIf Not Verified:Proceed to Step 2.If No:Move to Step 2.Step 2:Is there publicly available data for an alternative emission factor for the national grid of the country of origin?If Yes:Evaluate whether the data aligns with CBAM methodologies and is robust.oIf It Aligns:Use this alternative emission factor,provided it is reliable and consistent with CBAM requirements.oIf It Does Not Align:Proceed to Step 3.If No:Proceed to Step 3.Step 3:Is the default grid emission factor provided by the European Commission for the country of origin available?Use the default grid emission factor as published by the European Commission.These values are based on a 5-year average of International Energy Agency(IEA)data and are accessible via the CBAM Transitional Registry.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 42 Embedded Emissions in Precursors For embedded emissions in imported steel raw materials,Rick faced significant challenges as mentioned in Step 3.Given this situation,Rick decided to use default values published by the European Commission(Default values transitional period.pdf)for embedded emissions in precursors during the transitional period(until 30 June 2024).The formula for calculating embedded emissions with default values is as follows:Embedded Emissions(tCOe)=Quantity of Precursor(t)Default Emission Factor(tCOe/t)Does the data comply with CBAM methodology and is it reliable?Step 2:Is there publicly available substitute emission factor data for the national grid of the country of origin?Step 1:Is the electricity obtained through direct technical connection or a PPA?Has the actual emission factor been verified?Use this substitute emission factor Step 3:Use the default grid emission factor published by the European Commission Use the verified actual emission factor of the generation source Yes Yes Yes No No No No Yes Decision Tree for Determining Grid Emission Factors for CBAM Compliance EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 43 Default values are available as a temporary option when actual data from suppliers is unavailable.However,from 2025 onwards,stricter limitations will apply to the use of default values.Importers will need to demonstrate reasonable efforts to obtain verified emissions data from suppliers,as reliance on default values may lead to higher declared emissions and additional compliance costs.Therefore,Rick and the supply chain team had to intensify their engagement with Company Bull to encourage emissions data tracking and sharing.Step 5:Attributing Emissions to Production Processes and Products-Joint Efforts Required In this step,the focus was to attribute emissions to specific production processes and then allocating those emissions to the three products(Product A,Product B,and Product C)based on Company Alphas operational setup.As a downstream manufacturing SME,Company Alpha procures steel raw materials and performs final processing steps such as reheating,remelting,casting,forging,coating,and cutting.This operational context introduces specific challenges in emissions allocation,especially for shared processes like reheating and remelting.Collaborations:Seeking Support from Departments To address the complexities of emissions allocation,Rick engaged key departments,drawing on their expertise to ensure the allocation aligned with the engineering and business realities of the facility.1.Engineering Team:o Provided detailed insights into energy consumption and emissions sources for each processing step,such as reheating,remelting,and coating.o Highlighted the shared equipment used for multiple products,which created challenges for emissions allocation.2.Supply Chain Team:o Supplied data on material flows and production volumes for the three products,ensuring emissions could be allocated proportionally based on the mass of each product if necessary.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 44 3.Production Planning Team:o Contributed scheduling information to identify overlaps in processing steps and assess resource utilisation across the production lines.Attributing Emissions to Production Processes and Products Emissions were first attributed to the processing steps performed by Company Alpha,which include:1.Reheating and Remelting:Energy-intensive processes applied to all three products(shared equipment).2.Casting and Forging:Processes where emissions depend on the specific product and its production requirements.3.Coating and Cutting:Processes where emissions are more directly tied to individual product lines.Direct Emissions:Direct emissions from fuel combustion in reheating and remelting were identified as a pain point due to the shared nature of these processes across all products.After discussions with the engineering team,a temporary approach was adopted to allocate these emissions based on the masses of the three products,as this provided a straightforward and transparent method in the absence of more granular data.This approach aligns with CBAMs transitional guidance,which allows for practical allocation methods when precise measurements are not feasible.Indirect Emissions:Indirect emissions from electricity consumption were allocated based on metered data.Company Alpha had already installed electricity meters on most processing equipment,enabling engineering to allocate electricity uses across the processes for each product.While this method was accurate,it was complicated and time-intensive,highlighting the need to improve energy data collection in the future for a more streamlined calculation process.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 45 Embedded Emissions in Precursors:The allocation of emissions embedded in the steel precursor was relatively simple:emissions were allocated based on the mass of steel used for each product.This method was straightforward and aligned with CBAMs expectations for embedded emissions reporting.By leveraging departmental collaboration and adopting practical allocation methods,Rick and the team successfully attributed emissions to production processes and allocated them to Products A,B,and C.While temporary solutions,such as mass-based allocation for shared processes,were necessary,the process highlighted opportunities for energy management improvement,particularly in energy data collection.These steps ensured compliance with CBAM requirements and set the stage for more streamlined emissions reporting in the future.Alpha Companys Carbon Management Process Flow(Steps 2 5)Inputs Semi-finished steel/steel products(embedded emissions)Natural gas Purchased electricity Auxiliary materials,coating materials Production and Processing Stages Heating furnace(fuel combustion direct emissions)Casting/forging(electricity consumption indirect emissions)Coating and cutting(electricity consumption indirect emissions)Power systems(electricity consumption indirect emissions)Outputs Products A,B,C Embedded emissions from raw materials contained in finished products EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 46 Step 6:Quantifying All Emissions In this step,Rick compiled and calculated the total emissions allocated to each product based on the allocation of direct emissions,indirect emissions,and embedded emissions in precursors.This follows the allocation methodology established in Step 5,where emissions were attributed to production processes and then allocated to each product based on factors such as mass,energy use,and precursor inputs.The calculation below is an example of the emissions allocated specifically to Product C.Direct Emissions from Fuel Combustion:Input Data:Fuel type:Natural gas.Fuel consumption:150,000 m(allocated to Product C based on the masses of the three products)Conversion factor(NCV):0.03517 TJ/1,000 m(based on IPCC 2006 Gl).Emission factor:56.1 tCO/TJ(per CBAM standards)Calculation:Emissions=150,0000.0351756.1=295.96tCOe Indirect Emissions from Electricity Consumption Input Data:Electricity consumption:500,000 kWh(500 MWh)(allocated to Product C based on metered data and calculation)Grid emission factor:0.35 tCO/MWh.Calculation:Emissions=5000.35=175tCOe Embedded Emissions in Precursors Input Data:Quantity of steel raw materials:1,000 t(allocated to Product C based on inventory records)EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 47 Default emission factor for steel:2.21 tCO/t(per Default Values for the Transitional Period of the CBAM).Calculation:Emissions=1,0002.21=2,210tCO2 Total Emissions Rick consolidated all emissions to determine the companys total CBAM-relevant emissions:Emission Source Data Emission Factor Result(tCO e)Direct Emissions 150,000 m natural gas 56.1 tCO/TJ 295.96 Indirect Emissions 500 MWh electricity 0.35 tCO/MWh 175.00 Embedded Emissions 1,000 t steel raw materials 2.21 tCO/t 2,210.00 Total Emissions 965 t Product C 2680.96 Per unit emissions 2.78 Step 7:Negotiation Between Company Alpha and Company Bull With the emissions calculations complete,Rick and the supply chain team turned their focus to addressing the embedded emissions in precursors.However,they faced additional challenges due to the relative sizes and market dynamics of Company Alpha and Company Bull.Challenges Discussed 1.Relative Size and Influence:Company Alpha is a medium-sized player that is successful in its specific area but represents only a small fraction of Company Bulls customer base.As a result,Company Bull is less incentivised to prioritise the requests of a single customer like Company Alpha,considering it has many other larger customers.2.Company Bulls Perception of CBAM Implications:Company Bull has never sold products directly to the EU and initially assumed that CBAM compliance did not affect them.Negotiation Strategy 1.Illustrating CBAM Implications:Rick emphasised that CBAM compliance will likely become a recurring issue for Company Bull as more customers,like Company Alpha,seek verified data to meet their own obligations.On the other hand,their EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 48 products might have been sold to the EU via traders,and under the CBAM regime,EU importers will need to obtain verified emissions data from Company Bull through those traders.The implications for Company Bull are,therefore,not as indirect as they initially thought.The cost implications were also highlighted.If Company Bull does not provide verified data,their customers or the final importers will resort to default values,which are often much higher than actual emissions,potentially making the products in the value chain less competitive in the EU market.2.Proposing Third-Party Verification:To address Company Bulls confidentiality concerns,Rick suggested that Company Bull could engage an accredited third-party verifier to calculate and verify emissions data.This would ensure that Company Bull does not need to share sensitive production details with Company Alpha or other customers.Verified per unit emissions data would be sufficient for Company Alpha and the EU importers under CBAM regulations,as long as it complies with the verification standards set out in the CBAM regulations.3.Setting a Collaborative Timeline:Rick proposed that Company Bull begin collecting emissions data for the year 2023 by Q1 2024.Such data would then be verified by an accredited verifier during Q2 2024,allowing Company Alpha to transition from default values to actual data before the CBAM definitive period begins in 2026.This phased approach would provide both parties with sufficient time to align their compliance efforts and address data gaps.Outcome of the Negotiation After several discussions,Company Bull agreed to:Begin collecting emissions data for 2023 by the end of 2023.Engage a third-party verifier to verify the data during Q2 2024,ensuring compliance with CBAM verification requirements.This agreement ensures that Company Alpha will have access to accurate emissions data before the transition from the CBAM transitional period to the definitive period.It also positions Company Bull to address similar requests from other customers and traders,aligning themselves with the emerging demands of the CBAM regime.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 49 More details about the actions taken by Company Bull will be addressed in Case Study 2.Step 8:Reporting and Verification Facilitating Customer Communication while Mitigating Risks In this step,Rick and the supply chain team focus on two critical aspects of its carbon management system:reporting and verification.These steps ensure compliance with CBAM requirements and facilitate communication with EU customers while maintaining confidentiality of sensitive information.The company should adopt a strategic approach to consolidate,format,and share emissions data effectively and prepare for verification to enhance credibility and streamline reporting.Reporting:Consolidating and Communicating Emissions Data The primary objective for Company Alpha is to consolidate the emissions data collected and calculated in earlier steps and prepare it for communication with all EU customers(importers).This involves aligning with the EUs CBAM requirements,particularly the use of the CBAM Communication Template,while safeguarding potential confidentiality concerns.a.Strategic Use of the CBAM Communication Template The European Commission provides a voluntary communication template(in Excel format)to facilitate the exchange of emissions data between operators(such as Company Alpha)and reporting declarants(EU importers).While its use is optional,following this standardised format offers several advantages:Ensures that all necessary emissions data,including embedded emissions and production process details,are presented clearly.Simplifies communication,especially when dealing with multiple EU customers or trading partners,as the same format can be used consistently across all interactions.Rick took the key steps as follows:1.Populate the Template:Consolidate emissions data(e.g.,per unit emissions for Products A,B,and C)and input it into the relevant fields of the template.Ensure consistency with the methodologies used in earlier calculations.2.Use the Summary Tab:Fill out the Summary_Communication worksheet,which contains the minimum information required by EU importers.This will help limit the disclosure of unnecessary details.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 50 3.Train Internal Teams:Provide internal training to ensure the supply chain team members understand how to use the template effectively and address customer queries.b.Internal Data Consolidation Process Rick did the following to streamline reporting:1.Centralise Data:Established a centralised database(at early stage a well-designed workbook at intranet)to store calculated emissions data for Products A,B,and C,categorised by direct,indirect,and embedded emissions.2.Streamline Updates:Implemented a process to update emissions figures regularly to reflect any changes in production or energy use.3.Coordinate with EU Customers:Worked with the supply chain team and proactively reached out to EU customers to determine their specific data needs and ensure timely submission of the required information.c.Balancing Transparency and Confidentiality While the communication template encourages transparency,Company Alpha should adopt measures to protect sensitive business information:Provide Only Essential Data:Share only the summary details required for CBAM reporting,avoiding disclosure of proprietary production data unless necessary.Optional Summary Approach:Operators can choose to share high-level,aggregated data rather than detailed emissions calculations to safeguard sensitive process details.Confidentiality Mechanisms:Explore the CBAM Transitional Registry portal(available from 2025),which allows for secure data sharing with multiple reporting declarants while ensuring confidentiality of sensitive emissions data.Verification:Preparing for Verification of Emissions Data Verification of emissions data is a critical step for building credibility with EU customers and ensuring CBAM compliance.While verification by accredited third parties is not mandatory during the transitional period,preparing for it early offers strategic advantages,such as reducing reliance on default values,reducing the confidential information to disclose and enhancing the trustworthiness of reported data.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 51 a.Preparing for Verification From Company Alphas perspective,the preparation process involved ensuring that all emissions data is accurate,complete,and ready for review by an independent verifier:1.Organised Supporting Documentation:o Ensured all emissions calculations,data sources,and assumptions are well-documented and traceable.o Maintained detailed records of energy consumption(direct and indirect),production volumes,and precursor inputs,as these will be reviewed during the verification process.2.Engaged an Accredited Verifier:o Identified and contracted an accredited verifier who complies with EU standards,such as those under Regulation(EU)2018/2067.o Early engagement with a verifier allowed time to resolve any discrepancies or gaps in the data and might lower the overall costs for the verification exercise(verification service fees and internal resources used for the verification).3.Simulated the Verification Process:o Conducted an internal audit or dry-run verification by replicating the steps a verifier would take to assess the data.o Addressed any errors or inconsistencies identified during this internal review.4.Focused on the Key Scope of Verification:o The verifier would assess the accuracy of the emissions data,including direct,indirect,and embedded emissions,and ensure compliance with CBAM methodologies.o Ensured alignment with the CBAM Implementing Regulation,particularly in terms of monitoring methods and reporting formats.b.Verification Timeline Company Alpha aimed to have the emissions data for 2023 verified by Q1 2024.This timeline allowed sufficient time to address any issues and update CBAM reports with verified data before the correction deadline of 31 July 2024.EU CBAM Guidebook Chapter 4:Iron and Steel Sector Building a CMS 52 Step 9:Driving Emissions Reductions Through Collaboration The“sustainable”step in Company Alphas carbon management journey focuses on leveraging collaboration to achieve long-term emissions reductions across its operations and supply chain.By engaging with external stakeholders and internal teams,aligning with global standards,and participating in international initiatives,Company Alpha can not only reduce its carbon emissions but also support its customers and suppliers efforts to align with the EUs CBAM requirements and other climate policies.1.Collaborating with Suppliers to Reduce Embedded Emissions One of the largest contributors to Company Alphas emissions is the embedded emissions in steel raw materials,which is procured as a key input for its downstream manufacturing processes.To address this,Company Alpha worked closely with Company Bull to promote low-carbon steel production and align on data transparency.See how Company Alpha and Company Bull worked together in Case Study 2.2.Internal Collaboration to Drive Energy and Operational Efficiency Within its operations,Company Alpha fostered collaboration across departments to identify and implement emissions reduction initiatives.a.Energy Efficiency Projects As the fundamental efforts,Rick and the engineering team proposed to management and implemented a project to set up Energy Management System with ISO 50001 certification.Specific R&D projects were also planned and implemented to reduce energy consumption in energy-intensive processes such as reheating and remelting.Plans were also made to invest in energy-efficient equipment and explore renewable energy sources to reduce indirect 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