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24 I Companies & Markets bne October 2021
bne:Green
Fertiliser, electricity producers count the cost of the EU’s CBAM
Richard Lockhart in Edinburgh
The EU’s Carbon Border Adjustment Mechanism was unveiled in July with the express aim of preventing carbon leakage and applying a price to the CO2 embedded in a variety of industrial goods exported into the EU.
Two major industrial areas it will target are chemical fertilisers and electricity, with Russia, Turkey and Ukraine being major exporters into the EU.
The EU is framing the scheme as a way to reduce emissions, especially carbon leakage, and to meet the climate change targets of the 2016 Paris Agreement.
“If there is a serious risk of carbon leakage, if we take
the measures to comply with [the 2016 Paris Agreement on climate change] and others don’t, and it leads to
a disadvantage to our industries, [the EU] will have
no hesitation whatsoever to introduce a carbon border adjustment mechanism,” said Frans Timmermans, the EU’s Executive Vice-President for the European Green Deal.
More technically, the CBAM aims to protect industrial activity in the EU from imports from other countries with lower emissions regimes by raising the costs of those imports by imposing a carbon price based on the existing EU ETS system.
It also aims to reduce the incentive to move industrial activity, and therefore CO2 production, to countries outside the EU
by reducing the emissions-related cost savings on offer by such a move.
How does it work?
The CBAM fees will be calculated according to the carbon intensity of the product, the volumes of exports into the EU, and most importantly, the price of allowances on the EU ETS. This means that the prices will effectively mirror the current ETS.
However, the biggest change is that the current free allowances granted by the ETS to many dirty industries such as steel, chemicals and power will gradually be withdrawn over a 10-year period from 2026, meaning that these exporters into the EU in these sectors industries will gradually become more and more exposed to the carbon price.
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US TURKEY
RUSSIA
UKRAINE
SOUTH KOREA
CHINA
Estimate of CBAM fees in 2036. Selected countries and industries.
Chemicals
For the chemicals sector, energy-intensive nitrogen-based fertilisers are most vulnerable to the CBAM, ICIS noted recently.
This contrasts with organic chemicals, which for the time being are “not targeted (by the EU) due to technical limitations.”
The embedded emissions organic chemicals exported into the EU from third countries such as Russia and Turkey are
“If there is a serious risk of carbon leakage, if we take the measures to comply with the 2016 Paris Agreement on climate change and others don’t, and it leads to
a disadvantage to our industries”
not yet clearly defined, and the Commission said that data and analysis are required to target the current EU ETS allocations to these materials.
However, as the CBAM system is set to gradually replace the EU ETS over a 10-year period from 2026, it cannot be ruled out that organic chemicals will also be brought into the scheme.
Russia is particularly vulnerable, as it provided 31% of the 5.4bn tonnes of fertiliser exported to the EU in 2018-19, which themselves account for 29.5% of EU consumption, according to the EBRD’s Round Table on Climate Change and Sustainable Transition.
The EU’s other import sources are Egypt, Belarus, Algeria and Morocco, which provide 7-9% of such imports each.
The CBAM would target the emissions produced during the manufacturing of ammonia and nitric acid, which produce the most CO2 and NO2.