CBAM: The EU and its Policy to Spread Decarbonisation Worldwide

The European Union is well known for their stringent policies on climate change. The taxes and customs they impose on companies makes the EU a less attractive location to start business. As a result, companies have shifted to countries with weaker policies. This transition to other countries causes the risk of ‘carbon leakage’, leading to increased emissions in other countries due to EU goods being replaced by carbon intensive imports. As the EU doesn’t want to render their domestic efforts futile, they sought to introduce measure to counter this. As EU is at the forefront of climate change, their idea of inspiring others into taking action towards carbon emission reduction motivated the formation of the Carbon Border Adjustment Mechanism (CBAM). This system now puts a price on the emissions of carbon generated to produce goods imported by EU countries. On October 1st, 2023, the transitional phase of CBAM came into effect. Importers must now finish reporting by 31st January 2024. With such immediate action taken, EU is taking great strides to ensure their goals of carbon emission reduction are achieved.

As mentioned above, CBAM is a tool that puts a price on carbon emissions of imported goods. CBAM ensures that the price of carbon remains equivalent to that of domestic carbon to counter any disadvantage faced by EU producers. CBAM is aligned with the World Trade Organisation’s (WTO) regulations. It will initially apply to carbon intensive industries like cement, iron and steel, aluminum, fertilisers, electricity and hydrogen. As the complete system is put in place, it is expected to capture more than 50% of the emissions in ETS covered sectors. The entry of CBAM will take place in 2 phases, the transition phase (from 1 October 2023 to 31 December 2025) and the overall entry into force (from 1 January 2026).The slow process of phasing the system in is to ensure the public authorities and companies become familiar with the formalities and compliances.

3 points that EU importers must keep in mind while trading in CBAM goods:

  • Register: Importers covered by CBAM must register with national authorities, where they must buy the CBAM certificates, which are priced based on the weekly ETS allowances.
  • Declare: Importers must declare the emissions embedded in the goods they imported and must surrender their certificates.
  • Offset: Importers can also deduct the price they need to pay for the emissions if they can prove that the emissions were already paid for during production.

Action needed to be taken by businesses for CBAM:

  • Supply chain: Businesses will need to gather emissions related data from all stakeholders in the supply chain for reporting. Suppliers will need to carbon footprint and emission data of their products.
  • Comparative analysis: Importers will need to assess their financial risks and costs of importing goods and compare them to domestic production. Importers will have to make decisions on whether they would prefer low emission domestic suppliers or high emission imports.
  • Registration: Companies need to ensure they are registered with the relevant regulatory bodies. The European Commission has developed the CBAM transitional registry to help importers register and report.

Impact on Global and Indian Market

CBAM although still at a very early stage, has the potential to impact other economies that rely on the export of the CBAM goods. Developing countries that are highly dependent on the current CBAM sectors will be highly exposed. For example, Cement exporters in Ukraine, electricity suppliers in Turkey, iron and steel exporters of Zimbabwe, etc are highly exposed to CBAM, according to the CBAM Exposure Index curated by The World Bank.

asset-imageIn the above figure we can notice that India is towards to the middle of the exposure index, with an overall relative CBAM exposure index of 0.0310. The sector that will be most affected by the CBAM is the iron and steel sector and a share of 18.9% of goods exported to the EU. CBAM will thus put pressure on several energy intensive industries in India with estimates saying that CBAM could cost India 8 billion USD worth of exports to the EU. However, in the long run the good intentions of the EU to motivate others countries to take action against climate change will benefit India. CBAM will provide India with the motivation to transition into a renewable energy and reduce carbon emissions. The Indian governments continues its efforts to promote renewable energy through the Energy Conservation (Amendment) Bill, 2022. This bill also proposes a carbon trading system and India hopes that the EU will recognise it once it is place. India in the COP 26 announced that it is striving to achieve net zero 2070. The CBAM pushes India to achieve this goal through economic motivations.

Sustainiam’s Contribution

By 2026, sectors exporting to the EU will need to comply with CBAM. Sustainiam’s advanced products and services platforms provide companies with just what they need for accurate reporting. ECal, the emission calculating platform, streamlines your emission data to provide comprehensive reports on you Scope 1, 2, and 3 emissions. EmX provides direct access to the market place where the company can offset their emissions. Sustainiam also provides services related to CBAM reporting specifically.

In the end, the CBAM system not only focuses on catering to the EU’s set goals of decarbonisation, but helps spur change in other countries. As CBAM takes effect in 2026, companies need to get used to the reporting requirements and ensure they are able access and report the data accurately. The countries exporting to the EU will need to take measures to reduce their emissions in order to sustain the trade relations. As the world continues to balance trade ambitions and climate change, the CBAM can either be seen as a threat, which can only cause harm to business, or as an opportunity to make change for a better tomorrow.

Date: 02/04/2024
carbon pricing
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