As a global issue, climate change requires global solutions. There is a possibility of so-called "carbon leakage" as the EU increases its own climate ambition but its trade partners’ climate programs remain less stringent. When businesses located within the EU relocate carbon-intensive production to nations with more lax climate regulations, or when EU products are replaced by more carbon-intensive imports, carbon leakage occurs.[i]
The CBAM will initially be applicable to imports of a limited number of goods and precursors, including cement, iron and steel, aluminium, fertilisers, power, and hydrogen, whose manufacture is carbon intensive and most at risk of carbon leakage. When fully implemented, CBAM will eventually account for more than 50% of emissions in industries covered by the ETS thanks to its expanded scope.[ii]
Businesses will be required to get CBAM certifications that show they have paid a sum equal to the emissions in their supply chain and manufacturing processes. Every week, certificates will have a variable price that will be based on the previous week's average auction price for EU ETS allowances.[iii]
Source: European Commission
During the transitional period, there is some flexibility in the values used to calculate embedded emissions on imports according to the Implementing Regulation on reporting obligations and methodology. Companies will have three alternatives for reporting until the end of 2024: (a) complete reporting using the new technique (EU method); (b) reporting using one of three equivalent methods; or (c) reporting using default reference values.[iv]
Maersk, world leaders in international logistics reacted to the legislation by highlighting the need for supply-chain wide cooperation. Examining a company's supply chain in order to determine the sources and suppliers of any affected products is the first step in assuring compliance with any rule. The supply chain must be visible and transparent because improper reporting during the transition period may result in financial fines or make it more difficult to get the CBAM authorisation required for full implementation. The establishment of internal systems and expertise that include data gathering, reporting, and standard operating procedures, as well as close relationships and discussions with suppliers to help ensure their awareness of CBAM and the precise data they need to provide, are necessary for becoming familiar with the CBAM process and reporting.[v]
For steel producers in the EU, there are fears that CBAM could impact their competitiveness.
Andriy Glushchenko an analyst at GMK Centre, a Ukrainian think tank specialising in heavy industry said:
“According to our estimates, in 2022, EU steel sector bought only 6% of quotas on the market – everything else was covered by free quotas. Therefore, a decrease in the volume of free quotas, of course, will lead to an increase in the costs of companies. But on the other hand, as a result of the introduction of CBAM, the costs of importers will also increase, and, accordingly, the prices for products on the EU internal market. Thanks to higher prices, European producers will be able to fully or partially cover the additional carbon costs. At the same time, European producers may lose competitiveness in foreign markets, where other suppliers do not have the same carbon costs as in the EU, and CBAM does not offer additional measures to support exports”[vi]
The UK steel industry has also voiced concern over how CBAM could impact their market. With 75% of exports going to the EU, fears that CBAM will be a stumbling block are rife. Furthermore, industry leaders suggest that unless the UK matches the EU with its own carbon border legislation, then the UK could be flooded with steel produced to a lower environmental standard as exporters market’s flounder in the continent.[vii]
Gareth Stace the director general of UK steel said:
“By not acting now UK government will burst the dam, when high-emission, cheap steel floods the UK market while ruining our export opportunities at the same time.” He added “We need a UK Carbon Border Adjustment Mechanism to level the playing field on carbon costs across local and international suppliers. By having a competitive domestic steel industry, the UK can lead the way to Net Zero steelmaking.”[viii]
“Steel is vital to the UK’s economic resilience, jobs and hitting Net Zero targets for the wider economy, and integral to green tech, transport and future housing.”[ix]
More positivity surrounds CBAM with regards to the hydrogen market. Hydrogen Fuel News highlights four potential benefits for H2 production companies.
· Incentivising Green Hydrogen: Green hydrogen generation could be encouraged by CBAM because it uses renewable energy sources and doesn't produce any carbon dioxide. Green hydrogen may become more affordable compared to blue or grey hydrogen, which are created using fossil fuels, if the cost of carbon is taken into account when determining hydrogen prices.
· Levelling the playing field: The CBAM will equalise the playing field between domestic and international producers. It guarantees that, in terms of carbon pricing, all hydrogen producers, regardless of where they are, have comparable production costs. Companies who produce hydrogen and have already made investments in sustainable technologies and methods may gain from this because they will no longer be at a competitive disadvantage compared to businesses in nations with more lax environmental regulations.
· Driving Innovation: CBAM might stimulate new developments in the hydrogen sector. Companies might be compelled to investigate and invest in innovative technologies and processes that help lower their carbon footprint when the cost of carbon becomes a significant component of production costs. This could result in innovations in fields like carbon capture and storage, electrolysis efficiency, or the utilisation of other energy sources to produce hydrogen.
· Market Expansion: The implementation of the CBAM may result in a rise in the demand for green hydrogen throughout Europe. Businesses that can manufacture hydrogen sustainably can discover new business prospects in European nations that want to cut their carbon emissions.
[i] European Commission- Carbon Border Adjustment Mechanism
[ii] European Commission- Carbon Border Adjustment Mechanism
[iii] Institute of export and international trade- What is the carbon border adjustment mechanism?
[iv] European Commission- Carbon Border Adjustment Mechanism
[v] Maersk- Is your supply chain ready for Carbon Border Adjustment Mechanism?
[vi] GMK Centre- European steelmakers are concerned about the timing of the transition to CBAM
[vii] GMK Centre- UK Steel calls for faster implementation of UK CBAM
Oscar is a recent graduate with a background in earth science. He is currently studying an MSc focussing on disaster responses, emergency planning and community resilience. His postgraduate research project will assess the link between climate crisis risk perception and attitudes to green energy projects. “Adapting to the climate crisis through the pursuit of net zero requires community engagement and understanding. Zero Carbon Academy’s goals closely align with this approach and I’m excited to have the opportunity to research and communicate a variety of topics relating to our environment and sustainability”.
