The EU has introduced a new policy called the Carbon Border Adjustment Mechanism (CBAM) which will start in October 2023. This policy aims to reduce carbon emissions and prevent "carbon leakage".
What is carbon leakage?
Carbon leakage refers to a situation where companies transfer production to countries with weaker climate policies to avoid costs related to reducing emissions. The EU wants to prevent this from happening.
How does CBAM work?
CBAM will charge a carbon price on imports of certain goods into the EU, like steel, cement and aluminum. This carbon price aims to level the playing field by matching the carbon costs that EU producers face under the EU Emissions Trading System (ETS).
Initially, CBAM will only require importers to report the emissions associated with imported goods. From 2026, importers will have to buy CBAM certificates to cover these emissions at a price linked to the EU carbon price.
What is the current EU carbon price?
The current price of EU carbon allowances is around €86 per tonne of CO2. This carbon price has increased significantly in recent years.
Which companies will be impacted?
CBAM will especially impact companies outside the EU that export carbon-intensive goods like steel or cement to the EU market. For example, Indian steelmakers exporting to Europe may face CBAM costs of around 30% on top of the current price. This creates an incentive for such companies to reduce their emissions.
Accounting for carbon costs paid in origin countries.
If exporters have already paid a carbon price in their home country, this can be deducted from the CBAM costs. But carbon prices in most countries remain well below the EU carbon price.
In summary, CBAM aims to avoid carbon leakage and drive emission reductions globally by matching carbon costs faced by EU and non-EU producers. This will impact certain carbon-intensive exporters, but the effects will depend on their individual emissions levels.
Companies and products that will be impacted by the EU's CBAM
- Steel - ArcelorMittal, one of the world's largest steel producers, exports significant volumes of steel to Europe from plants in countries like India and South Africa. The emissions intensity of steel production at these plants is likely higher than the EU average, so ArcelorMittal may face significant CBAM costs on these exports.
- Cement - Major cement exporters to Europe include Turkey, Pakistan, Tunisia, and Egypt. For example, Turkish cement producer Oyak exports over 2 million tonnes of cement annually to Europe. With Turkey's carbon price well below the EU level, Oyak and other Turkish cement exporters are expected to face CBAM costs of over 40 euros per tonne.
- Aluminium - China's aluminium exports to Europe total around 2.5 million tonnes annually. Key exporters include China Hongqiao Group and Xinfa Group. Chinese production has higher emissions intensity than Europe, suggesting these companies could face CBAM fees of over $100 per tonne of aluminium exported.
- Fertilizers - Russia's fertilizer producers like Uralkali, Phosagro, and Eurochem are major suppliers to Europe. The natural gas-intensive production processes suggest high carbon intensity and significant CBAM exposure for these companies when exporting to Europe.
- Electricity - Producers exporting power to Europe from non-EU countries will also face CBAM costs linked to the emissions intensity of their electricity generation. For example, UK electricity exports to Europe are estimated to incur carbon costs of around 30 euros per MWh due to the high share of fossil fuels like gas in the UK's energy mix
