As published on: oilprice.com, Wednesday 4 October, 2023.
The EU’s Carbon Border Adjustment Mechanism (CBAM), commonly known as the “carbon border tax”, kicked off on October 1 in the first transitional phase for imports of several carbon-intensive groups of products into the European Union.
The first phase of the EU’s carbon import pricing legislation will not impose levies on the products—such will apply from 2026.
However, importers of iron and steel, cement, aluminum, fertilizer, hydrogen, and electricity into the EU will be asked—as of now—to report on the volume of their imports and the greenhouse gas (GHG) emissions embedded during their production, although they will not be paying any financial adjustment at this stage.
How It Works
As of 2026, EU importers and non-EU exporters will have to pay a levy on emissions tied to the products, as European manufacturers currently do under the EU Emissions Trading System.
The border tax on carbon is part of the EU’s emissions-reduction target to have net greenhouse gas emissions reduced by at least 55% by 2030, compared to 1990 levels. The carbon border tax will also serve a dual purpose, according to the EU—to keep European industrial competitiveness and encourage other countries to adopt greener policies and decarbonization of industries faster.
“CBAM is a WTO-compatible measure that encourages global industry to embrace greener and more sustainable technologies,” the European Commission says.
Imports could be at least partially exempt from levies when the tax enters into force in 2026 if the country of origin has an emissions trading system or other carbon policies similar to the EU’s.
What Will Change
The EU carbon border tax is expected to push materials and consumer prices higher, burden EU importers and non-EU exporters with additional reporting and red tape, and potentially change global trade flows in metals and other materials, analysts say.
A number of the EU’s trading partners have already criticized the bloc of green protectionism. The United States, China, India, Brazil, South Africa, and several other countries have expressed concerns that the new rules will further complicate trade and raise export costs for non-EU manufacturers, ING strategists Warren Patterson and Ewa Manthey wrote in a report earlier this year.
“The first and most obvious impact of the implementation of CBAM is that European consumers will face higher prices,” they said, adding that reporting obligations related to CBAM will also push up costs, which will likely also be passed on to consumers.
The financial impact of the carbon border tax could be significant for the EU imports, Boston Consulting Group estimated last year.
According to a BCG analysis, by 2032, the cost of iron and steel imported into the EU from the U.S. and UK could rise by 6%, from Turkey by 10%, from South Korea by 12%, from China by 17%, and from India by a massive 32%.
“The downstream impact could fall most heavily on the automotive, construction, packaging, and consumer appliances sectors—the biggest users of CBAM products. For example, an EU construction company importing 100 metric tons of Indian steel would pay CBAM costs of €24,600, or 32% of the current price,” BCG said.
For example, India’s position as a leading low-cost aluminum producer could be severely undermined due to its higher emission intensity compared to European counterparts. If sustainability and emission-reduction measures are not implemented soon, Indian exports to the EU will become much more expensive.
“Low-emission producers are likely to increase their share of exports to the EU, given the lower CBAM burden they would face, whilst higher carbon emitters will likely look for markets where their high emission intensity will not be penalised,” ING said.
Businesses Face Administrative Costs
The border tax is expected to drive up prices of goods and lead to changes in purchasing choices, The Conference Board, a global think tank and business membership association, said in research last week.
Not only consumers will face higher prices. Businesses will be additionally burdened by administrative costs for emissions reporting and verification—costs they could later pass on to consumers. The EU customs system also faces additional bureaucracy and checks, according to The Conference Board.
European members of The Conference Board were surveyed on how they expect the carbon border tax to affect their companies. A total of 83% of respondents—primarily senior procurement and sustainability executives--expect prices to rise, and 75% expect CBAM to influence their buying choices going forward.
According to the think tank, current attempts to ease the administrative burden are likely to fall short.
“Without fast action to address the administrative problems that importers will begin to face from next week, there is a risk that CBAM acts as a drag on the European economy,” Anuj Saush, European ESG Center Leader at The Conference Board, said last week, ahead of the October 1 start of the transitional, non-punitive phase of the carbon border tax.
The following months and years will show whether the EU’s carbon tax will weigh on European economies and whether the new mechanism will act as a driver of accelerated emission reduction policies and sustainability in industries in non-EU countries.