Bracing for the CBAM
The author is president of Lee & Ko Global Commerce Institute and former Minister of Trade.
The European Union has been most passionate in responding to climate change. The EU achieved carbon emissions goals committed to under the Kyoto Protocol and submitted the nationally determined contribution (NDC) as a part of the Paris Agreement, vowing to cut greenhouse gas emissions by 40 percent of 1990 levels by 2030. In December 2020, it upped the goal to 55 percent. The EU has been actively employing the emission trading system (ETS) to cover industries, buildings, transformation, sewage and farming facilities. By 2030, the union will be increasing renewable energy’s share to 32 percent.
The EU Commission in 2019 announced the European Green Deal initiative outlining action plans to achieve carbon neutrality by 2050. The EU earmarked 30 percent of its 1.85 trillion euro ($2.1 trillion) budget between 2021 and 2027 on green projects to help its economic recovery in the wake of pandemic.
In early June, the EU Commission drafted a proposal for carbon border adjustment mechanism (CBAM) as the centerpiece of the green deal. The proposal is intended to protect the domestic industry in the EU that could be at risk of the so-called “carbon leakage” and create a “level playing field” by inducing other countries to reduce greenhouse gas emissions. The policy is to ensure fair competition for EU companies who must produce products on carbon credit vis-à-vis imports produced with lesser burden on emission obligation, as consumers would prefer cheaper imports due to the gap in production cost.
The basic idea behind CBAM is to make importers report the embedded CO2 emissions in imported goods and pay proportionate charge for them. The greenhouse gas cost would be based on the EU emissions trading system. If a foreign producer could prove its purchase of emissions, the importer can deduct it from its carbon levy. EU would first apply the CBAM on carbon-intensive industries of power, cement, feed, steel and aluminum. After a grace period of three years from 2023, the mechanism would be activated from January 2026. Least developed nations would be exempt.
But how the mechanism can be carried out could be challenging. It cannot be easy to calculate the embedded CO2 footprint in imported goods. Cost of carbon permits also differs by market. Moreover, many countries have not adopted carbon emissions trade yet. The measure also could go against the World Trade Organization principle of requiring undifferentiated treatment on imports against domestic products and could be seen as a protectionist move. Still, experts believe the EU mechanism could have a positive effect on reducing greenhouse gas emissions. Since U.S. President Joe Biden also ordered the review of carbon border adjustments, countries would have to find means to lower carbon footprint in one way or the other.
Korea will be announcing its NDC at the 26th UN Climate Change Conference of the Parties (COP26) in Britain in November, outlining a carbon cut by 2030. In October last year, President Moon Jae-in vowed to achieve carbon neutrality by 2050.
The government must come up a detailed roadmap on overall carbon policy.