The European Union recently adopted a package of proposals to realise its ambitious target of a 55% reduction in carbon emissions compared to 1990 levels by 2030 and to become a climate-neutral continent by 2050.
As part of these efforts, the EU unveiled the Carbon Border Adjustment Mechanism (CBAM), a measure to prevent the risk of carbon leakage. CBAM will initially apply to sectors that have a “high risk of carbon leakage” and “high carbon emissions”, as per an official release. The sectors include iron and steel, cement, aluminium, fertiliser and electricity.
What is carbon leakage?
Since less stringent environmental and climate policies prevail in non-EU countries, there is a strong risk of so-called ‘carbon leakage’ – ie, companies based in the EU could move carbon-intensive production abroad to take advantage of lax standards, or EU products could be replaced by more carbon-intensive imports. Such carbon leakage can shift emissions outside of Europe and therefore seriously undermine EU and global climate efforts. “The CBAM will equalise the price of carbon between domestic products and imports and ensure that the EU’s climate objectives are not undermined by production relocating to countries with less ambitious policies,” the release said.
How will CBAM work?
Designed in compliance with WTO rules and other international obligations of the EU, the CBAM system will work as follows:
EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that it has already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM will help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.
CBAM will be phased in gradually and initially apply to a select few goods at high risk of carbon leakage — iron and steel, cement, fertiliser, aluminium and electricity generation. A reporting system will apply from 2023 for these products and importers will start paying a financial adjustment in 2026.
What will happen in the transitional phase?
Importers will have to report emissions embedded in their goods without paying a financial adjustment in a transitional phase starting in 2023 and finishing at the end of 2025.
Once the system becomes fully operational in 2026, EU importers will have to declare annually the quantity of goods and the amount of embedded emissions in the total goods they imported into the EU in the preceding year, and surrender the corresponding amount of CBAM certificates.
Impact on Indian steel exporters
It is estimated that Indian steel exports will become costlier anywhere in the range of Euro 35-60 per tonne. “The impact would be minimal for those steel plants adopting the gas-based DRI route, while the same would be higher for those steel plants producing steel through the BF/BOF route,” a senior official from AM/NS India told SteelMint.
The increase in cost will be mainly on account of upgrading to greener steel-making standards.
Underpinning the importance of ‘eco’-nomics in steel making, a source at a leading primary steel mill in India told SteelMint: “As such, no direct impact as yet, but it is a space to be watched out for… drive for carbon neutrality is here and now.”
Prices as on 9:00 IST, 19 Jul. d-o-d changes indicated against closing price of 16 July
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