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Carbon mechanism could knock 12% off EU industrial imports



7 February 2023
A ship approaching port. Credit: Mumine Durmaz

A new measure to stop emissions being shifted to countries outside the European Emissions Trading Scheme (ETS) will have a significant impact on trade flows in several key industrial sectors, a European Commission assessment has revealed. The Carbon Border Adjustment Mechanism (CBAM) is expected to reduce the combined import value of iron, steel, cement, fertilisers, aluminium, electricity and hydrogen by 11.9% by 2030.

CBAM gained provisional approval from European Council and Parliament negotiators in December.If signed off by Parliament and EU member states, it will impose a carbon price on imports based on the emissions involved in their production. The mechanism will be phased in this year, starting with data collection, with the new tariffs being introduced from 2026. Free allowances under the ETS, implemented to prevent EU countries from outsourcing high-emissions processes to outside countries, will be gradually phased out once import tariffs are imposed.

Sources involved in the regulatory process confirmed that there will be no direct impact on ship operators. Emissions from transport are not yet covered and the administrative burden will fall on the ‘declarant’, the entity placing the goods on the European market.

However, the indirect impact on ship operators could be dramatic given the changing flow of trade both into and out of the Union. A Commission impact assessment published in July 2021 shows that fertilisers will be the most affected, with imports in 2030 cut by more than 26%. In the least affected sector, aluminium, imports will fall by under 5%.

Fredrik Roald Brun, Associate at law firm Wikborg Rein told ICS that the full implications of CBAM could not be assessed until a final draft is produced. But he said that ship operators could be exposed to CBAM costs through their purchases.

If you are a European shipyard that relies heavily on aluminium imported from China, for example, the carbon pricing will make that aluminium more expensive, he said. That would likely have an impact on the cost of buying ships in Europe.

CBAM for ship emissions?

Brun reported that ship operators are more focused on other elements of European legislation, such as shipping’s inclusion in the ETS, and IMO efficiency measures introduced this year. But he pointed out the impact of CBAM could be a bigger issue in the future; the European Council, Commission and Parliament appear to have agreed to assess extending CBAM to cover embedded emissions from transportation services before the end of the transition period in 2026.

Exports from the EU will also be affected due to the higher costs of either using CBAM-exposed imports as raw materials, or replacing them with more expensive locally sourced materials. The impact assessment projects that EU exports in CBAM sectors will be reduced by 6.9% in 2030.

Tonje Hagen Geiran, Associate and Special Adviser at Wikborg Rein, explained that much of the discussion about CBAM in the business community has been around export competitiveness. European industrial producers have arguedthat the mechanism could be better designed to protect exports from Europe, and that current measures against carbon leakage are more effective than the new mechanism.

For companies that have a market outside of the EU, they will risk losing some of that market,” said Geiran.

The capability of regulators to accurately allocate all indirect, Scope 3 emissions, is also being questioned, Geiran added. “There are so many elements in Scope 3 emissions and they can be difficult to measure. Perhaps they will have to be measured by assumptions.”

The EU is not alone in considering a CBAM. In feedback to the initial proposal, Canada reported that it is already consulting citizens on a similar measure. Additionally, Brazil’s Ministry of Foreign Affairs has registered concern about the impact CBAM would have on non-EU companies trading into the EU, and on existing trade agreements and rules. “There are elements of the legislative proposal that indicate that the measure, either in its current design or in its implementation, could violate the obligations assumed by the European Union in the trade sphere,” the ministry wrote in its feedback.