Insights / April 26th, 2023

The EU Carbon Border Adjustment Mechanism: why Australian businesses should take note

The announcement of the EU Carbon Border Adjustment Mechanism (“CBAM”) has the potential to lock Australian businesses out of the EU by placing a tariff on “emissions intensive” goods that are imported into the EU.

The European Union has introduced the EU Carbon Border Adjustment Mechanism (“CBAM”) which is effectively a tariff on certain “emissions intensive products” that are imported into the EU. CBAM is part of a suite of legislative reform under the European Commission’s “Fit for 55” package which aims to meet the EU’s target to reduce net greenhouse gas emissions (scope 1, 2 and 3) by at least 55% of their 1990 levels by 2030.

The EU has a domestic carbon pricing regime under the Emission Trading Scheme (“ETS”) which places a price on the greenhouse gas emissions emitted in the creation of “emissions intensive” products within the EU. CBAM equalises the price paid for the emissions associated with EU products with equivalent international products to avoid “carbon leakage”. Carbon leakage occurs when the EU’s emissions reduction efforts are disrupted by organisations:

·         importing emissions intensive products into the EU; or

·         relocating production to non-EU countries with less progressive or ambitious climate policies, to avoid paying the ETS emissions price.

The resulting emissions price penalises carbon-intensive production and incentivises the adoption of low-carbon technologies.

CBAM will initially apply to the direct emissions caused by the production of the following “emissions intensive” products exported to the EU:

·         Iron and steel.

·         Cement.

·         Fertilisers.

·         Aluminium.

·         Electricity.

·         Hydrogen.

In 2026, the European Commission will consider expanding the scope of CBAM to include other products. CBAM will phase into operation:

·         From October 2023, importers will be obliged to collect and report data.

·         From 2026, the tariff will be payable. This tariff will be linked to the EU’s carbon market price (which is currently around €100 per tonne and is expected to continue to rise). In order to pay the tariff, EU importers will purchase “CBAM certificates” for the emissions embedded in the imported products and submit annual CBAM declarations.

The introduction of CBAM has signalled that all entities, from large corporates to SME’s, need to be considering their operational and supply chain emissions footprint. Australian businesses import many products and materials into the EU and the expansion of CBAM could mean that products made with emissions intensive processes and technologies could be priced out of the EU. Other countries (such as Canada and Japan) are considering implementing a similar regime.

It is no longer just a “good, socially responsible thing to do” to be measuring and reducing your greenhouse gas emissions; it is becoming an expectation (including from stakeholders, customers, employees, suppliers, insurers and finance providers) and strategically imperative to do so.

Australian businesses need to be considering the emissions intensity of their products and services and looking at:

(a)   for CBAM, carrying out an initial impact assessment and determining if any products will be covered by CBAM;

(b)   measuring their scope 1, 2 and 3 greenhouse gas emissions and establishing their emissions boundary;

(c)   moving to renewable energy sources and reducing their emissions through their production and supply chain;

(d)   setting emissions reduction targets in line with the Science Based Targets Initiative (SBTi), the Greenhouse Gas Protocol and Climate Active Standards; and

(e) more broadly assessing their climate risks using the Taskforce for Climate Related Financial Disclosures (and the new ISSB Standards, which are to be released in July 2023) and broader environmental and ESG related risks (including their impacts on nature and ecosystems more broadly).

At Cowell Clarke, our ESG team are well equipped to assist you in starting this journey and have developed a greenhouse gas emissions portal to assist you in measuring and tracking your greenhouse gas emissions. If you require any assistance or have any queries in relation to the above, please contact Emma Peters or Alexandra Kenny.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice.  You should not act upon the information contained in this publication without obtaining specific professional legal advice.  No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.