Hear our experts discuss how the EU Carbon Border Adjustment Mechanism (CBAM) is changing how many energy-intensive industries source materials, which industries it will impact and when, and what global leaders are anticipating could be next.
Featuring:
- Adrian Garcia, Business Unit Manager, Industrial Solutions, Lubricants & Energy | IMCD
- Katie Stiefermann, Global Marketing Manager & Sustainability Lead, Industrial Solutions | IMCD
Click above to watch our recent panel or keep scrolling to read a summary.
The global chemical industry has been anxiously watching the European Union to see how the rollout of the Carbon Border Adjustment Mechanism will impact the way many do business today. The EU’s new tool aims to address carbon leakage, promote global climate action, and protect the competitiveness of domestic industries. So, how will it work? What industries will it impact? And what can they expect? Keep reading to find out.
Understanding the Carbon Border Adjustment Mechanism
At the start of 2023, the European Union announced the “Carbon Border Adjustment Mechanism" or CBAM. It intends to place a carbon dioxide tariff on the imports of goods such as steel and cement into Europe. According to the International Carbon Action Partnership, this policy is the first of its kind in the world. And it is expected to make changes for companies in the EU importing raw materials.
According to the new tariff, companies that import into the EU will be required to purchase CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS. To break it down simply, the tariff aims to prevent cheaper goods from being made in countries with weaker environmental rules and then imported at lower costs. By imposing a tax on imported goods, the tariff makes it more expensive for European businesses to source materials and products from abroad, incentivizing them to instead turn to domestic suppliers.
When the CBAM starts and who it impacts
The law was initially discussed starting in 2022 with a rollout plan of 2023. Despite this, the full effects have still yet to be seen due to the allotted grace period.
EU's trading partners are already required to report the greenhouse gas emissions tied to their exports, so, we expect these to start to make an immediate impact on energy-intensive imports, including sectors such as:
- Iron and steel
- Cement
- Fertilizer
- Aluminum
- Hydrogen
- Electricity generation
- (And many others)
These sectors were chosen because they are known to have a high risk of carbon leakage and high carbon emissions. In fact, cement production accounts for nearly 7% of global CO₂ emissions) and steel production accounts for nearly 8%. But in terms of impact, it will take some time to see how this really changes the way things are done and to measure the results of the changes.
The European response to CBAM
It was anticipated that this would create pressure on Asian markets importing goods into Europe, but that’s not the only pressure that’s building. It’s also building pressure within Europe. Since announced, it has created a divide in the chemical industry. On one hand, European companies are all being pushed to decarbonize or defossilise by 2030 and invest billions into more sustainable approaches. On the other hand, many European companies are concerned that they could lose their competitive advantage with the tax in place.
So the question becomes, will this put Europe at a disadvantage when it comes to being a key player in the global economy?
Unfortunately, we cannot answer this question today. As of fall 2023, companies are expected to report on their emissions – but actual payments do not start until 2026. The two-year grace period was instated in the hopes of giving these industries the chance to better understand their supply chain and build a competitive advantage.
The world leaders' response to CBAM
So far, the EU CBAM is the only one in effect, but this does not stop global players from weighing in. As you can imagine, countries around the world are discussing this topic and analysing how it could affect them, and some are more excited about the potential than others.
In global forums, leaders have also debated the implications of a global carbon tariff. This is viewed by many as a viable solution to bringing the results needed to reach emission goals, but others disagree. The US, for example, has said they would expect to be exempt from such taxes.
Key takeaways
- The tariff is in place in the European Union, and its effects will start to be seen as soon as 2026 when the first payments are due.
- Energy-intensive industries are the target of the carbon tax, for now, and the tariff looks specifically at the import of iron and steel, cement, fertilizer, aluminium, hydrogen, and electricity.
- The new tariff is being watched closely by global players and discussions are already underway as to whether this model could bring further emissions benefits on a global scale.
IMCD Industrial Solutions | Sustainable Solutions Program
IMCD is committed to breaking down complex sustainability topics to support you at every step of your sustainability journey; whether you’re at the start or looking to optimize your current efforts. Click here to learn more about our Sustainable Solutions program and explore the sustainable materials we offer in your area.