At the end of last year, a large number of companies in Serbia received with confusion the news that the mechanism for regulating cross-border carbon emissions (Carbon Border Adjustment Mechanism - CBAM) came into force. The phones of various organizations that could be assumed to have an answer to the question of what this mechanism was, were alight. Unfortunately, the answers were often incomplete or even contradictory, and the reason for such inconsistency, as well as the absence of a central source of information on this topic, is the complexity of the mechanism itself, which led to a certain unwillingness of actors in the country to adopt the Regulation on CBAM by the European Parliament.

In order to fully understand CBAM, it is first necessary to understand the objectives of the climate policies of the European Union (EU). For almost 20 years, the EU has been limiting greenhouse gas (GHG) emissions through the implementation of the emissions trading system - the EU ETS. This system works by establishing on an annual level the maximum volume of GHG emissions from precisely determined industrial sectors within the EU, and then companies are allocated emission units ("permits" for the emission of one ton of GHG) which can be disposed of on the free market. Companies pay a fine for each ton of emitted gases for which they have not obtained an emission unit, thus forcing the economic sector to limit emissions that cause climate change. It went a step further when the European Green Deal was adopted at the beginning of 2020, with which the EU committed itself to making the entire European continent climate neutral by 2050 at the latest. That is, to equalize the amount of harmful emissions released into the atmosphere with the amount that is removed or neutralized. In order to achieve this, a proposal for the legislative package Fit for 55 was formed, which includes a wide range of legal norms and regulations aimed at reducing GHG emissions in EU countries through the promotion of renewable energy sources, strengthening energy efficiency, use of alternative fuels, etc. Then CBAM enters the scene, in the form of a specific measure proposed as part of the mentioned legal package. Although Fit for 55 affects the regulation of emissions exclusively by EU member states, the inclusion of an instrument such as CBAM reflects the recognition of the interconnectedness of global GHG emissions and the need for measures that go beyond national or regional borders to effectively combat climate change.

Carbon tax

CBAM is precisely targeting the phenomenon that is occurring due to the mismatch of climate policy ambitions of the EU and its trading partners - the so-called carbon leakage. Namely, companies operating within the borders of the EU can simply decide to move their production to other countries outside the Union where they do not have to pay the price for harmful emissions. In order to motivate EU trade partners to take steps towards reducing dependence on fossil fuels (but also to protect the domestic economy), CBAM introduces the principle of taxation of goods (that is, built-in emissions) that are produced outside and imported into the territory of EU countries, especially if such goods come from energy-intensive industries. The premise on which CBAM was developed is to treat all GHG emissions in the same way, regardless of where they come from. This means that the same taxation of emissions of imported products, as well as goods produced in the territory of the European Union, enables fair competition on the market. Hence the complementarity of the two systems - the above-mentioned EU ETS and CBAM. The area of ​​implementation of CBAM is products from the iron and steel, cement, aluminum, hydrogen and fertilizer industries, as well as electricity itself, when they are imported into the EU customs territory. In the coming years, the scope of CBAM is expected to be extended to all production processes included in the EU ETS, given the planned harmonization of the two instruments.

What does that look like in practice?

When importing goods into the EU, authorized importers will be required to purchase a CBAM certificate whose price will correspond to the average weekly price of an EU ETS emission unit. On the other hand, the price of emission units is formed by supply and demand forces in relation to the maximum volume of GHG emissions and the needs of companies to guarantee their own emissions. Wallets of authorized importers are the first to be hit by the adoption of the CBAM regulation. However, there should be no doubt that they will transfer this cost to the producers of goods, which can lead to significant economic consequences. The production sectors encompassed by the described mechanism represent an important source of employment and its application can potentially lead to an increase in unemployment if companies in the affected sectors become uncompetitive on the EU market due to high export prices. In addition, producers of goods will be required to provide reliable reports on emissions, otherwise the importer will estimate GHG emissions based on the average intensity of emissions of the country importing to the EU or, in case the country does not have instruments to consistently measure its emissions - based on 10% of the worst EU plants in terms of emissions, which in practice will mean a greater financial burden for the importer, and indirectly for the producer of the goods.

It should be noted that CBAM has been in a transitional phase since October 1 last year, which will last three years, with certain exemptions regarding emissions verification, established sanctions for improper reporting, and the purchase of certificates will not be required until its expiration. This period should be used well to adapt the Serbian economy to the existence of such a climate tool, to learn what the obligations are, to correctly measure emissions and, to the last extent, to decarbonize the production processes in the country.

Author: Marko Pajović, Belgrade Open School

Photo source: Freepick (bedneyimages)

The text was published in the annual edition of the BeRiskProtected platform "Power of Sustainable Business" (pages 72 and 73)