Published on: 12, by YS
On December 13th, Members of the European Parliament reached a provisional agreement with Council to set up an EU Carbon Border Adjustment Mechanism (CBAM) which was established as part of its ‘Fit for 55 package’.
“(CBAM) will be set up to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods”
The European community, with the ambition to become a carbon-neutral continent by 2050, had proposed several implementations and CBAM being one of them. Its main purpose is to prevent carbon leakage, ie. production moving out of Europe because of the carbon price.
In essence CBAM is a carbon border tax linked to the EU ETS carbon price. Importers will have to buy CBAM certificates corresponding to the amount of emissions generated in the production of those goods. The price of certificates will be linked to the EU ETS weekly average price. Even if the production company has already paid carbon obligation in its country of origin, the importer will need to buy the difference between the carbon price paid.
CBAM certificates are not tradeable nor bankable. They are valid for two years from the date of purchase. Importers can re-sell its certificates in excess up to a third of the total certificates purchased the year before.
Transitional period will apply for three years to avoid trading disruption. During this period importers will not require certificates, but they will have to report quarterly the actual embedded emissions in goods imported during this period.
The initial phase of CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as proposed by the Commission, and extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as to some downstream products such as screws and bolts and similar articles of iron or steel.
In parallel to the CBAM, free allowances under the EU ETS will be phased out, preventing double protection.
For the organizations with businesses in CBAM sectors, the new regulation means possible impact in their profit margin as well as additional operational burden.
The recommendation is to start preparing early on. Begin with an impact assessment to understand the products that get affected including their supply chain. Then establish processes to measure and report emission data.
The carbon price in EU ETS is comparatively higher than most other regions. For example as of 14 it is 89 Euros/tCO2 (122,000 won) whereas Korea KAU22 is 14,800 won / tCO2. In simple terms, had the regulation been in effect today, Korean companies would have to pay 107,200 won per tCO2.
The next step is for the Parliament and Council to formally approve it.
Any border taxes have a direct impact on both sides of the markets. CBAM in particular will increase final retail costs of related goods. The importers and producing companies will bear the burden to comply with the regulation. The producing companies will be motivated to improve their carbon efficiency. From a global climate action perspective, CBAM can set precedent and become the model for other countries to follow suit. Already countries such as Canada and Japan are considering similar legislation [ec.europa.eu].
Published on: 12, by YS
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