Unveiling the Carbon Border Adjustment Mechanism (CBAM)

Governance & Regulations


min |

The EU's Efforts to Reduce Carbon Emissions

As the world grapples with climate change, significant policy measures are being implemented to stimulate emission reductions. A game-changer in this regard is the Carbon Border Adjustment Mechanism (CBAM), a core component of the European Union's (EU) climate strategy, aiming for net-zero greenhouse gas emissions by 2050. Part of the EU's "Fit for 55" initiative, the CBAM is set to enact a 55% reduction in CO2 emissions by 2030 compared to 1990 levels.

CBAM: An Innovative Approach to Prevent Carbon leakage

The CBAM, commonly referred to as the carbon border tax, came into effect on July 14th, 2021. It’s an innovative mechanism designed to prevent 'carbon leakage' - a situation where businesses move their operations to countries with less stringent carbon restrictions or where EU products are replaced by more carbon-intensive imports. By imposing a tax on the carbon emissions associated with goods imported into the EU, the CBAM encourages industries globally to reduce their carbon footprints. According to a European Union Commission impact assessment, CBAM could cut EU emissions in relevant sectors by 13.8% by 2030, and worldwide emissions by 0.3%.

Carbon Border Tax's Impact on Global Industries

Businesses importing goods from outside the EU are required to comply with the CBAM regulations. Starting January 2023, importers have new carbon reporting requirements. From 2026, they'll need to purchase carbon import permits, the cost of which is linked to the EU’s domestic carbon price, expected to reach at least €75 by then. Certain sectors will be more affected initially. These include steel, aluminium, cement, electricity, and fertilizers, meaning that industries like automotive, construction, and packaging could see significant impacts. Non-EU suppliers not adhering to EU climate standards could lead to higher costs for businesses relying on their products.

On top, the CBAM holds global implications. It paves the way for international pressure on businesses to prioritize carbon reduction strategies, potentially leading to a fairer playing field for EU manufacturers and higher environmental standards worldwide.

As such, CEOs and business leaders need to factor in the CBAM into their strategic decisions. A more sustainable, low-carbon approach may lead to cost savings and improved customer perceptions. It encourages EU producers to decarbonize and non-EU producers to enhance efficiency. The CBAM also aims to mitigate carbon leakage, expecting to reduce it by 29% by 2030, without significant disruption to economic growth. Hence, CBAM's significance extends beyond environmental impact, making it an important consideration for businesses' strategic planning, as sustainable practices may lead to cost savings and improved customer relations.

Preparing Businesses for CBAM Compliance

As the CBAM is gradually implemented, organizations must adapt to these changes and reconsider their supply chains and carbon management strategies. The path to a more sustainable future is clear, and the CBAM is one of the significant steps in this direction.

A key for businesses success in asessing the impact of CBAM is to pinpoint the source(s) and quantity of their emissions. This knowledge is vital in comprehending the full implications of CBAM — considering the short-term focus on direct emissions tax and its future extension to indirect emissions as well.

Navigating CBAM with Five Glaciers Consulting

In the new era of climate accountability, understanding the CBAM's impact on operations and taking early action not only ensures compliance but can also turn this challenge into a sustainable competitive advantage. Investing in low-carbon technologies and sustainable production processes can potentially enhance profits and reduce unnecessary costs, leading to a more sustainable, greener future.

Five Glaciers Consulting offers services such as CBAM eligibility assessments, emissions calculations and life cycle assessments (LCA), and the development of CBAM action plans. If you want to learn more about CBAM and how Five Glaciers Consulting can assist your organization, we encourage you to reach out to our expert team.

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