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As the global demand for fertilisers continues to rise, exporting companies in countries with less stringent regulations than the European Union (EU) have been able to remain cost-competitive in the market. However, a new policy adopted by the EU is set to move the needle. European Union struck a political deal on 13th December 2022 to impose a carbon dioxide emissions tariff on imports of polluting goods such as steel and cement, a world-first scheme aiming to support European industries as they decarbonise.
The EU has implemented a policy of carbon tariffs, which means that exporting companies will now have to bring their sustainability efforts in line with those of EU companies if they want to continue exporting to the region. This includes paying equivalent taxes to the governments of their respective countries or reducing their emissions. Countries which fail to green their industries will soon face a new threat: an effective carbon tax that will penalise those hoping to profit from high-carbon activities, and force them to clean up.
Estimating the total tariff bill requires some tricky assumptions about the future carbon permit price and rates of improvements to manufacturers’ carbon efficiency. A 2021 analysis by the European climate think tank Sandbag offered some projections for China, a relatively high-carbon manufacturing economy. At the current carbon price of €90 per ton, CBAM charges levied on imports from China by 2035 could amount to about $772 million. That’s not chump change, but the sum is dwarfed by China’s total exports to the EU in 2021: $472 billion.
There will be two main effects of this tariff. One is that lower-emission versions of certain products—Chinese steel made with hydropower rather than coal power, for example—will be routed to the EU, with everything else saved for domestic consumption or export to less picky markets. The other is that the policy will induce more countries to invest in low-carbon power and industrial R&D, implement their own carbon prices, and take other steps to help their companies avoid the tariff. (The US, for instance, may be nudged to follow through on plans to create carbon tariffs of its own.) Over the next decade, low-carbon manufacturing is certain to become much cheaper as technology becomes more efficient and the price of low-carbon power falls. The threat of the tariff, in other words, could spur the investments needed to avoid it.
CO2 emissions costs will be imposed on imports of iron and steel, cement, fertilisers, aluminium and electricity. Companies importing those goods into the EU will be required to buy certificates to cover their embedded CO2 emissions. The scheme is designed to apply the same CO2 cost to overseas firms and domestic EU industries – the latter of which are already required to buy permits from the EU carbon market when they pollute. It will also apply to imported hydrogen, which was not in the original EU proposal but which EU lawmakers pushed for in the negotiations. For exporting companies, this presents a significant conflict. In order to remain cost-competitive, they will have to take measures to reduce their emissions or offset them, which can be a costly endeavour. Alternatively, they can choose to pay the carbon tariffs, but this will eat into their profits and make it difficult to win contracts. The countries most affected by Europe’s moves are likely to be those with high-carbon export industries such as China, Turkey, India and potentially Australia.
In order to resolve this conflict, exporting companies will need to prioritise auditing and carbon accounting in order to identify areas where they can reduce their emissions or offset them at a lower cost. This may require investing in new technologies or processes, but the long-term benefits will be worth it. Overall, the adoption of carbon tariffs by the EU has brought a new level of complexity to the exporting industry. Companies will need to adapt and find ways to remain cost-competitive while also meeting the sustainability standards of the EU. The end result, however, will be a more sustainable and environmentally responsible industry.
Is your organisation prepared for such international regulations coming up that can affect your bottom-line? Stay prepared and ensure accurate analysis of carbon footprint of your business to stay ahead of competition. Reach out to us at Carboledger to know more about how your organisation can calculate carbon footprint accurately in a verifiable manner to stay prepared for the changing regulatory landscape. We expertise in manufacturing sector are trusted by Fortune 500 companies.
Sustainable enterprises stand as beacons of responsible business practices. Increasing primary data share within their systems is a pivotal step to that end.
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