BlogCarbon Border Adjustment Mechanism (CBAM)

From October, large parts of industry face CBAM

Written by

Ulf Narloch

Published on

The world’s first carbon border adjustment can accelerate the decarbonization of industry by means of a CO2 levy on imports. Through the imported goods covered CBAM affects companies in the metal, energy, chemical, and construction industries. They have to comply with new reporting requirements starting October 1.

CBAM as a game-changer

The EU Carbon Border Adjustment Mechanism (CBAM) is the world’s first “carbon tariff” of its kind. The potential impacts are considerable. CBAM could lead to shifts in trade flows and supply chains and also contribute to the decarbonization of industry.

As a core instrument for climate neutrality in the EU, CBAM is intended to avoid carbon leakage to non-EU countries when the free emission allowances for EU producers in the EU Emissions Trading Scheme (ETS) are cut.

The CBAM levy on the embedded emissions in imported goods increases the cost of CO2-intensive goods, while green alternatives and countries with less carbon-intense production routes become more competitive. In addition, the incentives for non-EU countries to introduce their own CO2 pricing systems increase.

The ETS-aligned import levy via the purchase of CBAM certificates is not to be introduced until 2026. This levy will then be gradually phased in until 2034, so that the cost effects will initially be limited.

In order to build up the data and reporting systems for calculating emissions, the transitional period already starts this October. During this period, importers of goods covered by CBAM will have to comply with extensive reporting requirements.

Affected imports and industries

The CBAM rules initially apply to iron & steel, aluminum, cement, fertilizers, electricity, and hydrogen. These sectors cover the goods with the highest risk of carbon leakage, which account for more than 50% of the emissions covered by the ETS. The expansion to other goods is planned.

Based on EUROSTAT trade data from 2022, EU imports from third countries of CBAM goods accumulate to EUR 158 bn. In Germany alone this makes EUR 20 bn. Metal goods made of iron & steel and aluminum account for the majority of these imports. 

This represents only 5% of total EU imports (and 3% of German imports) from third countries. However, the goods covered play a critical role for large parts of the industry. As a result, a large number of companies of different sizes and sectors are likely to be affected.

Metal

With the iron & steel and aluminum goods covered by CBAM, metal imports worth EUR 121 bn are affected across the EU. In Germany alone, the figure is EUR 17 bn.

Iron & steel and aluminum products account for 75% of this figure. The products covered, which also include merchandise such as screws and bolts (EUR 8 bn) and aluminum foils (EUR 2 bn), are likely to affect a wide range of trading companies.

Imports of unwrought aluminum (EUR 20 bn) and raw steel (EUR 1.4 bn) also fall under CBAM. Casting and processing companies that purchase these precursors from non-EU countries will need to watch CBAM too.

Overall, EU’s tightened CO2 pricing will play a two-fold role for European steel mills and aluminum smelters:

  1. CBAM increases the cost of importing relevant precursors, such as iron ore, from non-EU countries
  2. By phasing out free emission allowances in the EU ETS, the production costs themselves rise

With rising costs, European aluminum and steel producers will experience lower competitiveness on world markets as there is no compensation for European exporters in the CBAM. At the same time, the rising carbon costs also increase the economic attractiveness of switching to greener alternatives.

Energy

With EUR 22 bn in EU imports from third countries, electricity is the next largest CBAM sector after iron & steel, and aluminum.

However, more than half of this comes from Norway and Switzerland, which are exempt from CBAM. Further exemptions could be added if the countries’ electricity markets are so integrated with the EU internal market that CBAM rules cannot be applied.

Petroleum products are not currently covered by CBAM. However, these could follow in the event of a CBAM expansion. This would then increase raw material costs for refineries. At the same time, the attractiveness of countries with lower CO2 intensity in crude oil production would increase.

CBAM will also influence the dynamics in hydrogen trade. Currently, EU imports of hydrogen are negligible. However, these are likely to grow rapidly and steadily as industrial demand increases.

As long as capacities for the production of green hydrogen are still being developed, only emission-intensive alternatives remain for production. CBAM shifts the cost advantage from grey to blue hydrogen, making investments in carbon capture and storage (CCS) more attractive. 

Chemicals

CBAM also covers certain fertilizers and their precursors. Currently, EU imports of these goods amount to EUR 14 bn. This affects not only agricultural trading houses but also the chemical industry.

Urea accounts for half of this, with an import value of EUR 7 bn. It serves as a feedstock in the chemical industry and as a nitrogen fertilizer. EU imports of mixed fertilizers amount to EUR 3 bn.

Ammonia imports come in equal. In addition to its role for nitrogen fertilizer, it is also used as a hydrogen carrier. With CBAM, the importance of green ammonia as a basic chemical is likely to grow. 

The chemical industry could also come under increased scrutiny if CBAM is expanded to other goods. The addition of basic chemicals and polymers (plastics) had already been discussed in the negotiations on the CBAM regulation.

Construction

The construction sector is also affected by CBAM through imports of cement clinker and cement types. However, these goods are only traded to a small extent across EU borders. Consequently, total EU cement imports covered by the CBAM rules are comparatively low with a value of less than EUR 1 bn.

However, cement has a very high emission intensity due to the manufacturing process of cement clinker, which will lead to a high cost burden on such imports from CBAM.

Importers are forced to act

Carbon will become a greater cost factor in industry through the interaction of CBAM and the stricter rules in the EU ETS.  Overall, higher commodity prices are to be expected, which will ultimately be passed on to end consumers.

In the long term, this will increase the competitiveness of green products from climate-friendly production processes. At the same time, these are subsidized in Germany via carbon contracts for difference (CCfD). Thus, CBAM does not only accelerate the decarbonization of supply chains but also the green transformation of industry in Europe.

While affected importers should analyze the long-term impact of CBAM on their production costs and supply chains, in the short term, compliance with reporting requirements must be ensured.

For this purpose, the required CBAM data must be collected starting this October and submitted to the EU on a quarterly basis in a CBAM report. Failure to submit the data could result in significant penalties, so implementation should begin immediately.

A free CBAM check is available online. This enables importing companies to find out for which import goods the CBAM reporting has to be set up.


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