In December 2022, the European Union (EU) reached a provisional agreement on a Carbon Border Adjustment Mechanism (CBAM). The CBAM is a key component of their “Fit for 55” climate package, which aims to increase its emission reductions to at least 55% of 1990 levels by 2030.
What is the EU Carbon Border Adjustment Mechanism?
The EU’s CBAM is a proposed policy aimed at preventing carbon leakage and levelling the playing field for European businesses by ensuring that businesses operating within the EU pay for their carbon emissions in a consistent manner, regardless of where their products are originated.
Under the EU Emission Trading System’s (ETS) cap-and-trade approach, emitters are required to hold emission allowances for every tonne of CO2 they emit within a calendar year. These allowances can be traded or bought, and at the end of each year, the emitters surrender enough allowances to cover their full emissions.
Historically, a large portion of industrial emissions in the EU have been covered by these allowances; carbon price signals are weakened as a result. It is anticipated that these allowances will begin to be phased out by 2026, with further cuts to allowances if companies do not introduce decarbonisation measures.
The CBAM will be simultaneously phased in and applied to goods imported into the EU from countries that do not have equivalent carbon pricing systems. This works by requiring importers to declare the embedded emissions in goods imported into the EU, then purchase and surrender the number of CBAM certificates equivalent to those declared emissions. Effectively, they would have to pay the difference between the EU carbon price and the carbon price under which the goods were produced.
This could increase the cost of their goods, making them less competitive in the EU market. In turn, this could result in a reduction in imports into the EU, or even the loss of market share.
As the carbon price is incorporated into the final price of the good, carbon pricing between domestic and foreign products is equalised.
How Does it Impact Australian Businesses?
Initially, the CBAM will apply to a limited number of sectors where a high risk of carbon leakage exists:
cement
iron and steel
aluminium
fertilisers
electricity and hydrogen
In Australia, the government and academic analysts do not foresee the CBAM as having a significant direct impact on trade in the short term because few Australian goods compete directly with local industries that are covered by the EU ETS. However, a significant impact is likely to be experienced if other jurisdictions adopt similar carbon pricing mechanisms. For example, the UK, US and Canada are also considering carbon border taxes.
The draft CBAM regulation, released in December 2022 contains provisions for countries that meet certain criteria to be exempt from CBAM. This includes:
entering an agreement between the country and the EU to fully link the EU ETS and the emission trading system of the originating country; or
having a comparable carbon price to that of the EU ETS paid in the country in which the goods originated.
What Can You Do to Prepare?
Measure and Report
In preparation for the introduction of the EU CBAM, affected industries will need to assess the carbon content of their products and evaluate the impact on their operations. The policy imposes reporting requirements from 2023 with financial implications taking effect no later than 2026.
Future proof
For those currently not covered by the EU CBAM, consideration should be given to future proofing. Australian businesses could be subject to carbon pricing as more of our trading partners adopt carbon border taxes (i.e., UK, US, Canada).
Decarbonise
The ultimate goal is to eliminate carbon emissions and reduce the impacts of climate change. This makes decarbonisation a global imperative. Decarbonisation can be achieved through a range of measures, such as improving energy efficiency, using renewable energy sources, applying circular economy principles and reducing waste. Business will need to develop strategies to reduce their carbon emissions in line with new regulation, and reduce their risk due to financial penalties resulting from the cost of carbon.
Future Proof Your Business with a Decarbonisation Strategy and Australian Carbon Credits
Decarbonology’s consulting and carbon accounting practice helps businesses of all sizes and industries measure their emissions, develop emissions reduction strategies and provide access to Australian and international carbon credit projects.
We can also advise you on your compliance and reporting obligations and support you at every stage of your Net Zero journey.
Contact us to get started on your decarbonisation journey today.
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