How to use Power Purchase Agreements to decarbonise under CBAM

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is now in its transitional phase, meaning that importers of covered products must start reporting on the embedded emissions of their goods. Many are looking for ways to reduce their GHG output and the amount of CBAM quotas they must purchase.

In this article, we tell you how renewable Power Purchase Agreements (PPAs) allow covered industries to decarbonise their electricity consumption in alignment with CBAM. We explain what CBAM means by “embedded emissions” and how long-term contracts for electricity procurement can help importers switch to clean power

What is the Carbon Border Adjustment Mechanism (CBAM)?

CBAM is an EU policy instrument that puts a price on the GHG emissions embedded in products imported into the EU. It requires importers to pay a carbon price equivalent to what European producers face under the EU Emissions Trading System (ETS), to level the playing field and avoid carbon leakage — where production moves to countries with laxer climate regulations.

In its initial phase, CBAM covers six carbon-intensive goods: cement, iron and steel, aluminium, fertilisers, hydrogen, and electricity. It also considers certain volume thresholds for importers who must pay the carbon price. In 2026, the European Commission will assess whether to extend CBAM to other GHG-intensive sectors at risk of carbon leakage.

What are embedded emissions, according to CBAM?

CBAM defines embedded emissions as the greenhouse gases released during the production of goods that are imported into the EU.

The calculation of embedded emissions is confined by process boundaries — in other words, everything that happens in, for example, a factory for the production of a certain good. This includes direct emissions from the manufacturing processes, such as gas combustion (Scope 1), and indirect emissions, which are related to the electricity used in production (Scope 2).

How are electricity-related or indirect emissions calculated within CBAM?

Importers of CBAM-covered goods have several options to calculate the GHG intensity of the electricity they use.

Firstly, companies that consume electricity from the grid can use the average emissions factor for their area — often their country — established by the International Energy Agency (IEA). In cases where this is not available, there are other sources of public data that provide emissions factors, such as national energy agencies. Manufacturers that produce their own electricity within their facilities can report on the fuel mix used to generate such electricity.

Another possibility is for factories to have a direct cable to an external electricity producer, bypassing the public grid. In this case, companies should use the fuel mix of the generation device they receive power from. 

A fourth option is to have a Power Purchase Agreement (PPA) with an electricity producer, which also allows consumers to report GHG output based on the emissions factor of the specific device they are sourcing from.

How to decarbonise electricity consumption within CBAM?

There are mainly four ways to reduce electricity-related emissions in line with CBAM:

1. Introduce energy efficiency measures. The most carbon-free electricity is that which is not consumed.
2. Produce your own renewable energy — for example, by installing solar panels on the rooftop of your factory. These, however, will typically provide only a fraction of the facility’s total power consumption.
3. Consume electricity from low-carbon grids. Grid emissions factors can vary widely. It may be unfeasible, however, to move production to a location with a cleaner electricity mix.
4. Enter a PPA with a renewable energy producer.

Why are renewable PPAs useful to reduce indirect emissions under CBAM?

PPAs are contracts by which an electricity consumer agrees to buy power from a producer at a stable price over an agreed period (read more on PPAs here).

What makes renewable PPAs interesting from a CBAM perspective is that they allow off-takers to claim the carbon intensity of the renewable energy producer while sourcing physically through the grid, even in areas with high carbon content. To be valid, PPAs should also deliver Energy Attribute Certificates (EACs) that document renewable power consumption.

Currently, CBAM does not recognise unbundled EAC purchases, as it requires a closer tie to the production of clean energy. PPAs provide that link without the need for a direct physical cable feeding a specific factory.

What criteria should PPA off-takers follow to comply with CBAM?

There are still no official criteria for PPAs under CBAM. The European Commission is expected to publish guidance on electricity decarbonisation by the end of 2025, which will likely contain requirements for PPAs.

As we wait for more detailed documentation, consumers using PPAs to comply with CBAM should follow good international market practice. This includes cancelling EACs bundled with the electricity they receive under their contracts.

The I-TRACK Foundation, the organisation that runs the I-REC renewable energy tracking system, has published a methodology to ensure that PPAs fulfil CBAM’s objectives and has included a number of countries as examples of how companies can follow best practices in their locations, including Albania, Egypt, Mozambique, and Malaysia.

How can Ecohz help

We help you get the most out of PPAs with expert guidance worldwide. Our advisors walk you through the entire process, from choosing the right project to delivering climate and financial targets. Our goal is to simplify how companies use a suite of sustainability solutions, making it easier to reduce emissions and unlock their positive impact.