CBAM (Carbon Border Adjustment Mechanism)
Navigating Carbon Borders:
A Safe Passage Strategy
2024.07.01
As 2024 unfolds, Countries heavily reliant on emission-heavy industries in their economies are on high alert. With just five years remaining until the 2030 review of their emission reduction targets, several developed economies have begun implementing climate-related regulations to ensure progress. The European Union (EU) is leading this development, with the full implementation of the EU Carbon Border Adjustment Mechanism (CBAM) scheduled after the transitional period ends in December 2025. Concurrently, the United States is advancing the Clean Competition Act (CCA), while the United Kingdom (UK) plans to introduce its equivalent of CBAM by 2027.
According to the World Bank, the EU is the third-largest destination for Korean iron and steel exports, following the US and China. The Korea Energy Economics Institute predicts that Korea's expenditure on purchasing CBAM certificates could amount to approximately 8.1% of its EU steel and aluminum exports, totaling 259.6 billion won (roughly $197 million). Lack of clarity regarding impending regulations and their financial implications could significantly burden companies in the short and medium term.
What are the current border adjustment mechanisms?
EU CBAM
It is the only officially executed carbon border adjustment regulation at the moment, and its main goal is to:
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Safeguard the competitiveness of domestic industries involved in global trade as they implement emission reduction measures,
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Encourage trading partners with lower climate targets to enhance their ambition, thereby fostering consistency across markets in high-ambition nations.
During the transition period until 2025, companies are required to report the emission levels of their exported products to the EU. Once the transition period concludes in December 2025, importers must purchase CBAM certificates equivalent to the ETS allowances on the ETS market, reflecting the greenhouse gases (GHGs) contained in the covered products they intend to import. If the originating country of the imported products has a carbon price equivalent to the EU ETS allowance price, it will be fully recognized and rebated to the importer. However, if the carbon price in the originating country is lower, only a fraction of the allowance purchase price will be rebated. Therefore, the EU CBAM certificate price will be aligned with the EU ETS price.
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EU CBAM Sectors
Currently, six categories of products are identified as covered under the EU CBAM: cement, electricity, fertilizers, iron and steel, aluminum, hydrogen, and chemicals. With the exception of hydrogen and electricity, the other product categories encompass multiple specific products that fall under the EU CBAM. Detailed lists of these products can be found here.
During the transitional phase, the EU CBAM encompasses Scope 1: direct emissions, Scope 2: emissions from grid-provided electricity generation, and Scope 3: emissions upstream.
Emission Categories | Definition | Examples |
|---|---|---|
Scope 1 | Direct. Emissions generated from the production of CBAM goods at installation level (including the production of heating and cooling) | Emissions associated with fuel combustion in production and distribution |
Scope 2 | Emissions from the electricity consumed to produce CBAM goods | Purchase of electricity, steam, heat, or cooling |
Scope 3 | Emissions from input material purchased by production facilities for us and the manufacturer of covered products under CBAM scope. | Purchased goods and services, capital goods, fuel and energy-related activities, transportation and distribution, waste-generating operations |
CCA
Unlike the European Union's Carbon Border Adjustment Mechanism (CBAM), the Clean Competition Act (CCA) has not yet been implemented in the United States. This bill, proposed by the US Senate in 2023, aims to establish a domestic regulatory framework to reduce greenhouse gas (GHG) emissions from the industrial sector.
Once enacted, the CCA will impose fees on producers whose GHG intensity exceeds a specified benchmark. Producers with GHG intensities below the benchmark will not incur additional expenses. To promote a rapid decline in GHG emissions over time, the benchmark will decrease annually, and the associated fees will rise accordingly. The revenue generated from these fees will be used to incentivize investments in low-carbon technologies and other initiatives designed to reduce industrial emissions further.
Each industry will have a benchmark for carbon emissions, which will represent the average intensity of eligible facilities (measured in tons of GHG per ton of product) within the national industry.
If the CCA becomes law, approximately 20 energy-intensive industries will be impacted, including:
<Industries Regulated by the CCA>
Alumina refining and primary aluminum production | Petroleum and coal product manufacturing |
Paper (except newsprint) mills | Iron and steel mills and ferroalloy manufacturing |
Basic organic chemical manufacturing (adipic acid only) | Asphalt paving mixture and block manufacturing |
Pulp mills | Lime and gypsum product manufacturing |
Ethanol alcohol manufacturing | Refined petroleum |
Bituminous coal underground mining | Cement manufacturing |
Industrial gas manufacturing (hydrogen only) | Paperboard mills |
Petrochemical manufacturing | Glass |
Fossil fuels: crude oil & natural gas extraction | Nitrogen fertilizer manufacturing |
*Source: whitehouse.senate.gov/news LINK
The standard and cost of carbon emissions
EU CBAM
The EU aims to utilize country averages for various EU CBAM products but currently lacks adequate data to publish official numbers. During the current transition phase, the EU is gathering the necessary data to set a baseline. In the future, producers might have to pay a fee if their products come from facilities with emissions higher than those of the worst-performing facilities within the same product group in the EU.
CCA
The EU aims to utilize country averages for various EU CBAM products but currently lacks adequate data to publish official numbers. During the current transition phase, the EU is gathering the necessary data to set a baseline. In the future, producers might have to pay a fee if their products come from facilities with emissions higher than those of the worst-performing facilities within the same product group in the EU.
Solutions and Strategies for Korean Companies and Government in Response to Regulations
While it would be ideal for companies to provide accurate measurements of their carbon emissions, it is currently difficult for many companies to verify the exact number for each product within the allotted time. This makes government guidance and support essential. Therefore, companies should submit estimated measurements, even if they rely on the EU's default carbon emissions values as a temporary reference. With the CBAM transition period until 2026, it is in the best interest of Korean companies and the government to submit their reference values on time, as they can be revised to more accurate values after submission. Failure to submit or late submissions will result in penalties of €10 to €50 per ton.
Meanwhile, the Korean government should persist in negotiations with the EU Commission to have the Korean ETS recognized as equivalent to the EU ETS, aiming to minimize costs wherever feasible.
In addition to recognizing the K-ETS, the Korean government and companies should also monitor other developments from the EU Commission. Other countries that could be significantly affected by CBAM, including Turkey, China, Russia, and the United States, should also be continuously observed. Analyzing the strategies and solutions adopted by these countries will help Korean companies effectively prepare for the potential impacts and costs associated with CBAM or CCA. Additionally, if research and investment in clean technologies—such as carbon capture, utilization, and storage (CCUS), hydrogen, and the decarbonization of carbon-intensive industries—slow down, Korea will struggle to keep up with the coming carbon-neutral era.