The Carbon Border Adjustment Mechanism: Can carbon pricing be your new competitive edge?

Just 0.9% of Australian and New Zealand exports will be captured by the European Union’s CBAM when it begins on 1 October 2023 – but it’s a policy portend of what’s to come.

In brief

  • The EU’s new Carbon Border Adjustment Mechanism aims to prevent ‘carbon leakage’ by imposing a tariff on some emissions-intensive imports: iron, steel, cement, fertilisers, aluminium, electricity, hydrogen and some chemicals.
  • The policy sends a clear signal to countries and corporations around the world: If you don’t set policies to drive ambitious emissions reductions, we will do it for you.

The European Union’s new Carbon Border Adjustment Mechanism (CBAM), is a ‘green tariff’ that will transform how countries and companies approach international trade in the context of climate change.

The EU has set a demanding target of 55% greenhouse gas emissions reductions on 1990 levels by 2030, and the CBAM has been introduced to help meet that target.

The EU CBAM, which works alongside the EU Emissions Trading System (EU ETS), aims to prevent ‘carbon leakage’ and level the playing field between domestic and imported goods by placing a carbon price on certain imports based on their carbon footprint.

While this might seem deliberately punitive to the EU’s trading partners, its main objectives are domestic. Ensuring that imports face a carbon price that is equivalent to that incurred by EU manufacturers strengthens domestic carbon pricing — and broader climate policies.

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The EU has sent a clear signal to governments and corporations around the world: If you don’t set policies to drive ambitious emissions reductions, we will do it for you.

How EY can help

Producers in non-EU countries will be incentivised to reduce their greenhouse gas emissions, or to compensate for that through the purchase of CBAM certificates. Governments, meanwhile, will be challenged to set more ambitious domestic carbon pricing policies.

 

When it comes to policy, the devil is always in the detail — and the EY Net Zero Centre unpacks that detail in our new thought leadership report, Carbon pricing and the new competitive edge.

 

The EU’s policy could be the catalyst for a chain reaction. Japan, Canada and the UK, among others, are considering similar schemes to CBAM, while the United States’ proposed Polluter Import Fee promises to place tariffs on imports from nations without ambitious climate change policies.

 

Exporting countries could face a choice between taxing their companies at home or allowing them to be taxed at the border in Europe. As CBAMs become more common, countries will increasingly make the choice to capture this revenue internally.

What does this mean for my company?

At first, the EU’s Carbon Border Adjustment Mechanism will influence a small fraction of Australian and New Zealand exports – but it is a trend that requires careful and thoughtful navigation.

Every industry faces their own unique obstacles and opportunities, and the EY paper, Carbon pricing and the new competitive edge, illustrates this with detailed examples for aluminium, steel and agriculture. But there are five common themes that cut across most industries that business leaders should consider:

  1. Carbon calculations and data collection: Determining the carbon footprint of affected products will require data on everything from materials extraction to shipping. Complex calculations, technical expertise and robust data collection will be essential – and the time to start investing and upskilling is now.
  2. Supply chain scrutiny: Multinationals will be sharpening their supply chain scrutiny to understand the composition of their emissions. We expect this will drive change along the length of supply chains, regardless of whether the end product is exported to the EU. Suppliers should start considering how they can use the CBAM to demonstrate transparency and strengthen trust with supply chain partners.
  3. Clean up or pay up: Businesses trading in captured commodities and products will be forced to either reduce their emissions, absorb CBAM’s carbon price or pass it down the supply chain. The CBAM will incentivise a wide range of companies to either clean up their act or pay the price. The first step is to set a net zero target and map out the pathway to get there.
  4. Indirect economic impacts: CBAM will also have indirect economic impacts, such as increasing the cost of Chinese steel imports to the EU, which may itself be manufactured with Australian iron ore and coal. CBAM will create positive price signals for clean exports. Taking advantage of our abundant and low-cost solar and wind resources, minerals endowment, land availability, and scientific and technological capacity, can position our nations to prosper in a low-emissions world.
  5. A policy portent: While CBAM’s impact on Australia and New Zealand is currently small, it could accelerate efforts from other countries to introduce their own CBAMs – and this could have far bigger impacts on our markets. The message here is clear: transitioning industries that are reliant on fossil fuels to renewable power will ensure they can operate under any future scenario.

Summary

Countries and companies that fail to clean up their carbon act risk their international competitiveness. As they traverse the road to net zero, corporate leaders should quicken their pace now — not only because it is the right thing to do, but because failing to lead today could come at a cost in the years ahead.

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