BAKU, Azerbaijan, March 1. Carbon Border Adjustment Mechanism (CBAM) of the European Union will increase the supply-chain costs of covered commodities, which will be passed down to downstream sectors and consumers, Trend reports via Fitch.
“This scenario has spurred discussions over trade protectionism and discrimination against EU’s trading partners, as the carbon tariffs may encourage Asia-Pacific (APAC) industrial producers to divert trade flow towards markets that do not impose such schemes to remain cost competitive. The effectiveness of carbon tariffs to curb carbon leakage should improve as the scale of carbon markets and covered sectors expand,” Fitch said in its latest report.
The CBAM is a proposed EU-wide regulation establishing a border tariff on the import of carbon-intensive products into the EU. It forms part of the EU’s “Fit for 55” package introduced under a series of proposals in July 2021 to aid the European Commission in delivering the European Green Deal. It is set to be the world’s first such mechanism to address carbon leakage and will be launched in 2023, once the relevant legislative processes in the EU are finalized, with the aim to become operational in 2026. Between 2023 and 2026, importers will need to report the greenhouse gas emissions of commodities captured under CBAM to the EU Commission, while certificate purchasing will commence in 2026. Unlike the ETS’s “cap-and-trade” system, CBAM will not cap imports or emissions and there will be no trading of carbon permits.
“Cost pressures for major APAC exporters of raw materials and industrial products should be limited in the short term, but the carbon tariffs may encourage the development of technologies and regulations to limit the long-term ramification for APAC exporters.
We believe APAC exporters will be incentivized to develop clean production technologies that meet the more stringent EU emission standard. Regulators could also be more inclined to set up domestic carbon-pricing mechanisms to encourage a reduction in carbon intensity and minimize downside risk amid a growing trend of carbon tariffs, elsewhere around the world,” reads the report.
---
Follow the author on Twitter: @Lyaman_Zeyn