CBAM continues to cause concern for the iron & steel, aluminium, energy, fertilizer, hydrogen, and cement sectors one month after it went into force, with several observers saying it puts a monkey wrench in their plans. We explore what was said.
The idea behind the European Union's Carbon Border Adjustment Mechanism (CBAM) is to prevent cheaper, dirtier items from undercutting EU companies that must meet stricter climate requirements and pay for pollution under the emissions trading plan. EU officials anticipate global industrial decarbonization to accelerate.
The CBAM mechanism is one of five legislative actions from the Fit for 55 package, which was approved by the European Parliament in April 2023. The package aims to reduce greenhouse gas emissions by 55% by 2030 (compared to 1990 levels). With a transition period during which importers are only required to report, it goes into effect on October 1, 2023. The process will be applied gradually over the course of 2026–2034 as the ETS increasingly removes free permits.
"The problems that were raised before have not been addressed, and we find ourselves in the same predicament as we were one month prior" said one of our clients, an importer of CBAM goods (on & steel, aluminium, energy, fertilizer, hydrogen, and cement goods and their products) claims that there is still a lot of ambiguity on how CBAM will affect international commerce and the supply chain.
During the 2024–2026 transitional period, all iron & steel, aluminium, energy, fertilizer, hydrogen, and cement producers as well as those that process these CBAM products will be required to reveal their direct and indirect emissions. Importers have to then report it to the EU Commission, and exporters are the "middleman".
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Many EU importers of CBAM goods are finding it difficult to submit embedded emissions, although the transitional phase offers some flexibility since it acts as a trial period and will help the EU gather all data on embedded emissions.
"It is clear that the likelihood of reporting embedded emissions inaccurately is substantial. "Suppliers are not always transparent in giving full details, and checking the accuracy of information is tricky," said a European importer of CBAM goods. Reports on default settings will also stop at the end of the next year, they said.
Since they will need more workers to manage the EU documents, some small importers in the UK and EU are also worried.
Smaller importers find it difficult, particularly at this moment when steel is already under strain. It is simple for large importers in the UK and the EU to recruit additional workers." "The EU can provide small businesses with CBAM with more support," said Arne Mielken, CBAM consultant at Customs Manager Ltd.
The first importer reporting period began on October 1 which was the commencement of the CBAM's transitioning phase. As per the European Union, the National Competent Authority (NCA) of the Member State where the importer is headquartered is the one who grants access to the transitional registration.
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Exporters voice concerns
Exporters said they had accepted the CBAM reporting standards for now, although they are still in the transitional phase. They did, however, convey their want for further information on the emissions default value.
Early in November, Indian Business and Industry Minister Piyush Goyal told regional media that the EU's proposed carbon price on imports is misguided and would be disastrous for the nation's manufacturing sector.
The minister claimed that India is developing a mechanism of its own to impose a price on carbon.
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Iron and Steel
The China Iron and Steel Association also said at the beginning of November 2023 that CBAM will increase export costs and function as a roadblock to Chinese exports. Among the products covered under CBAM for the steel sector are pig iron and DRI/HBI, semi-finished steel, slab, billet, certain manufactured steel products, screws, nuts, bolts, and other similar iron and steel items. Ferroalloys and scrap are not included.
Japanese steelmakers recently emphasised that the approach disadvantaged imported goods by unfairly forcing importers to provide data that EU steel producers do not. Japan's 1.85 million tonnes of annual steel shipments to the EU, which make up over 5% of its total exports, might suffer greatly if the reporting system is implemented as planned.
Concerns over CBAM are also held by steel industries in Argentina, Turkey, India, and South Korea. They claim that the strategy violates WTO regulations and hurts imports relative to producers in Europe.
Due to the restricted capacity for renewable energy, European steelmakers are also worried about the circumstances surrounding the CBAM changeover. Before the system is completely implemented, South Korean steel makers requested the government to convince the EU to permit domestic carbon emission estimates for a longer length of time. India also wants the EU to accept its carbon credit trading programme.
Aluminium is lightweight and strong, used in aeroplanes, cars, and solar panels. The most energy-intensive metal in the industry is so-called “solid electricity”. Aluminium manufacture accounts for 3% of industrial emissions, according to the International Energy Agency, more than aeroplane emissions.
European aluminium makers worry that a carbon border tax gap might enable exporters like China to flood the EU with cheap, emissions-heavy metal. There is a loophole that allows widespread greenwashing of imported aluminium products and undermines CBAM's carbon leakage prevention. This loophole may be exploited to remelt and market garbage as carbon neutral in Europe. This is, so it is claimed, because it permits remelted aluminium offcuts to be marketed as zero-carbon goods, even if the raw material was produced from coal or other fossil fuels. as a result, this would push non-EU producers to produce as much waste as possible for remelting and selling to Europe.
Europe's aluminium producers' claims follow concerns about a lack of rebates for exports containing taxed imported aluminium, cars and cans containing highly polluting aluminium being allowed in without paying for metal production emissions, and the loss of free emission allowances.
Download Report: The aluminium value chain and implications for CBAM design
The cement industry is the second-largest industrial emitter worldwide, contributing 4% of the EU's CO2 emissions. Cement production considerably adds to CO2 emissions. The cement industry is the second-largest industrial emitter, contributing 7% of world CO2 emissions, and demand is expected to rise. Cement is essential for many activities, such as buildings and infrastructure, and is crucial for the net-zero transition.
In 2027, the 27 EU member states will levy third-country cement exporters for their CO2 emissions from EU sales. It is well known across the cement industry that companies from Turkey to Australia have manufactured and transported their cement into the EU at high CO2 costs while still outperforming local suppliers. Lawmakers fixed the problem by giving EU businesses free ETS credits, including cement. The EU ETS is a key policy for addressing climate change and reducing emissions. The cap-and-trade approach allows corporations to swap allowances within a set limit. The ETS provides free emission permits for up to 100% of cement sector emissions to address carbon leakage problems and prevent relocation, making EU cement manufacturing uncompetitive with lower-cost, higher-emissions imports.
Download: "Concrete policies to underpin the cement transition"
Not included in the original proposal from the European Commission, the CBAM will now include hydrogen along with cement, steel, aluminium, fertilisers, and energy.
The European Commission, European Parliament, and Council engaged in interinstitutional talks, or trilogues, which resulted in the inclusion of hydrogen in the EU CBAM.
It was expected that hydrogen (CN 28041000) would be crucial to the EU being carbon neutral by 2050. Hydrogen finds its use in several areas and may be utilised as feedstock, fuel, energy carrier, or storage solution.
The EU does not yet have a commodities market for liquid hydrogen. The most popular way of supplying hydrogen is via captive production, which ensures a steady supply of the gas. Approximately 90% of the total capacity for producing hydrogen is generated internally or recovered (as a byproduct) by industrial customers. The so-called "merchant hydrogen," which is generated and sold under long-term contracts by other parties, only makes up about 10% of the overall capacity for hydrogen production.Eleven Here, hydrogen is marketed as a specialty chemical for use in industry and, sometimes, as a means of transportation energy. It is anticipated that the EU hydrogen market would eventually transition to a mostly liquid commodities market that uses Guarantees of Origin as certifications.
Download Report: The inclusion of hydrogen in the EU CBAM
In conclusion, it is clear that CBAM continues to be a source of contention and dispute among the corporate community. It is also clear that there is much ambiguity over the right approach for importers to submit their emissions to European Union bodies. There is valid worry about the absence of correct information, which forces importers to depend on possibly deceptive data for reporting reasons. Concerns have been raised about the capacity and desire of CBAM product manufacturers to provide the necessary data and correctly compute emissions. Furthermore, it is typical for importers to get items via wholesalers, who in turn obtain them from the open market. As a result, locating and monitoring the origin of the CBAM product is a considerable difficulty. The difficulty in determining the original manufacturer raises concerns regarding the practicality of such an undertaking. The failure of importers to complete proper reports on January 31, 2024 is related to the many outstanding issues. The European Union must act decisively while yet allowing for more time.
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