Business challenges in era of carbon border adjustment
Governments around the world have introduced various policies to reduce carbon emissions.
Imposing carbon taxes on products and emission trading systems that allow companies to trade their carbon emission reduction performance are a few examples.
They are all geared toward encouraging carbon reduction by incorporating carbon emissions as part of the cost of doing business.
The problem is that different countries impose different prices on carbon, depending on how strong or lenient their regulatory stance is.
Differences in the prices of carbon lead to differences in the costs of producing similar products across different countries.
To reduce the unfair gap in product prices driven by the gap in carbon prices, the EU’s Carbon Border Adjustment Mechanism (CBAM) imposes tariffs based on the difference between the carbon price of the country where the product was produced and that of the EU when importing the product with high carbon emissions.
Under the CBAM, the EU will first impose tariffs on six imported goods, i.e., steel, cement, aluminum, fertilizer, electricity and hydrogen, in January 2026 after a two-year transition period from October 2023.
In the U.S., five bills related to a carbon border adjustment have been proposed since June 2023.
Among these proposed bills, “PROVE IT ACT (Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency Act)” was proposed in July 2023 and was passed by the legislation review committee on Jan. 18 this year.
If passed into law, the PROVE IT ACT will require the U.S. Department of Energy to review the carbon intensity of the manufacturing process of 22 designated items (including steel, cement, hydrogen, core minerals, natural gas and solar energy) in major countries.
The U.K. government also announced that it would implement the Border Carbon Adjustment (BCA) in 2027, and it would finalize the BCA items this year, which will be followed by further discussions on its implementation.
The U.K. government is expected to include carbon-intensive products such as iron, steel, aluminum, fertilizer, hydrogen, ceramic, glass and cement in the BCA list. Australia and Canada are also contemplating policies similar to CBAM or BCA.
Last January, I was invited to the EU-Asia Policy Workshop hosted by Institut Montaigne in France to introduce Korea’s response to CBAM and carbon prices in Korea.
Earlier this month, I also had an opportunity to share challenges that Korean companies are going through in the wake of CBAM at the Border Carbon Adjustment Workshop organized by Chatham House and attended by experts from various countries, including the U.K., EU and Brazil.
During the series of fervent discussions on introducing CBAM and responding to CBAM, I could sense that CBAM is no longer an idea sketched in a blueprint and has already become part of stakeholders’ action items.
CBAM is an unprecedented system for everybody, and we are expecting a bumpy road ahead.
In the case of EU CBAM, which is already in operation, companies had to submit their first quarterly reports on per-product carbon emissions by January 2024.
While the European Commission published in August 2023 the CBAM Implementing Regulation that sets forth items to report, procedures and emission calculation formula, only a few met the timeline.
Only 10 percent of the obligated companies fulfilled the reporting requirement in Germany and 11 percent in Sweden. After all, the EU extended the time to report by one month.
Companies in non-EU countries, such as Korea, are experiencing even more challenges. About 1,700 Korean companies are required to report their carbon emissions under CBAM and most of them are small and medium-sized enterprises (SMEs).
According to a survey released by the Korea Federation of Small and Medium Business in October 2023, 78.3 percent of 300 SMEs said they did not know about the EU CBAM. In addition, 54.9 percent of 142 companies that had exported to the EU or were looking to enter the EU market as of 2022 said they have no special response plan.
Some raised practical issues in totaling the operating time of each machine for production and the amount of power spent, thereby being left with no guidance on how to put relevant data into a report, which often consists of several tens of thousands of rows in a spreadsheet.
Meanwhile, larger companies with experience in participating in the domestic emission trading system for the past 10 years are relatively more prepared to transition to CBAM. Some companies organized a dedicated team to prepare for CBAM a year in advance and submitted reports earlier than the regulatory deadline.
If carbon border adjustment is an inevitable wave, transitioning to the new system as soon as possible is the key to maintaining one’s competitive edge. SMEs are among the most vulnerable to this sweeping wave. They often do not even have any dedicated person in charge of thinking about carbon emissions reduction. Since reducing carbon emissions requires managing emissions across the supply chain, the government has reason to provide more support for SMEs to achieve the target emission reduction for the whole society.
In addition to this support system tailored to SMEs, wider support for businesses of all sizes is also required, such as by improving the emission trading system in Korea to create an environment that is more compatible with carbon border adjustment and incentives for reducing carbon emissions for their products.
SMEs are among the most vulnerable to this sweeping
wave.