This week the Carbon Border Adjustment Mechanism (CBAM) moved a step closer to reality when the EU outlined plans to introduce the new border tax on imports of carbon-intensive cement and other industrial products (aluminium, iron, fertilisers, electricity and steel) with high carbon footprints. MEPs reached a provisional agreement with the Council to start the CBAM process.

The transition period of 2023-25, before full implementation in 2027, will be closely monitored. Importers will provide evidence of their carbon emissions and buy digital certificates linked to the emissions embedded in the goods they have manufactured and imported to the EU. With prices being set by the average price of permits auctioned each week, it is hoped that any price rises, or falls, will be graduated.

The new CBAM Bill will be in full compliance with the World Trade Organisation (WTO) rules and will apply from 1 October 2023. This will be a complex case as any tax on foreign producers must not exceed that which is levied on domestic producers to fall within WTO rules.

CBAM governance will come under the Commission's jurisdiction with the CBAM process being reviewed by the end of 2027. As part of the 'Fit for 55 program', CBAM is a crucial tool in the EU's armoury to slash carbon emissions by 55 per cent by 2030. CBAM's introduction will also see free allowances given to the cement sector under the EU Emissions Trading Scheme tapered by 10 per cent annually and eventually eliminated by 2036.

The European cement sector supports the introduction of the carbon border tax, provided it is properly structured. Isidoro Miranda, president of the European cement association, CEMBUREAU, argued in a speech at Cemtech Europe 2022 that carbon leakage was already happening: Because of the EU ETS scheme, "... the EU industry is paying EUR8/t more to produce cement" than importers of cement and clinker to the EU. Presently, CEMBUREAU reports that Spain has seen an increase of 489 per cent in cement imports between 2016-20, Greece's cement imports have risen by 630 per cent and the first seven months of 2021 saw a 37 per cent increase in EU cement imports from outside the region.

Implications for CBAM's introduction
Analysts argue that developing countries and trade in general will be affected by CBAM's introduction. The Hill suggests the EU could see an estimated 11 per cent fall in trade by 2030 because of the new arrangements. Carbon pricing will be key with 46 countries tethered to an average weekly price. Currently some countries are at US$6/t and others, like the EU and UK have regularly-priced carbon at US$75/t.

CBAM is expected to have the greatest impact on trade flows from Russia, Ukraine, Turkey, China, USA and UK, according to International Tax Review. The USA is already responding with President Biden’s Inflation Reduction Act which will subsidise US investment in renewables with critical components having to be sourced from US-based producers to secure state subsidies. This is expected to price out foreign competition in sectors such as batteries, cars and renewables.

German initiative
German Chancellor, Olaf Scholz, has sought to unify large countries in their climate schemes and pricing through the proposed 'climate club' in 2020 among the G7 countries. Having formed an initial agreement at the G7 Elmau summit in June 2022, the club's official launch will be at COP28 in Dubai, UAE, in December 2023. Anaysts have suggested that CBAM could be circumvented by joining the climate club, which has an agreement that commits to work, "towards a common understanding through comparative analysis of the effectiveness and economic impact of such policies, including price-based and non-priced based climate change mitigation instruments."

Common understanding could lead to countries like the USA arranging to lower the carbon border levy on its US products like steel being imported to the EU. High-ranking officials are thought to favour CBAM only if they can simultaneously be shown to largely do without a border mechanism within a climate club.  German officials also have until COP28 to convince African nations relying on aluminium trade with the EU that they would be supported if their trade is impacted by CBAM.

Summary
The principle of CBAM is to prevent carbon leakage and to provide a level playing field for trade, while reducing CO2 emissions. Whether it creates an unfair advantage in practice can only be assessed after the price of CBAM certificates and their uptake is known. Arguably, it will act as a counter-trade measure with investment at source required and monitoring of emissions as well as a levy on imported goods. Cheap cement and clinker imports may well be phased out at a single stroke from major exporters such as Turkey and Algeria, protecting the EU cement industry.

Moreover, CBAM may not incentivise carbon capture. In 2019 the IEA reported that cement was the most expensive and hardest to abate industry. It is possible that carbon capture uptake might still not be widespread by 2036 when free allowances from the ETS scheme are eliminated.

Peter Hoddinott, industry consultant and former Lafarge executive, warned that CBAM will be a revolution for cement producers in Europe. With zero free allowances, the carbon cost to produce a tonne of CEMI (ordinary Portland cement) could reach EUR97/t (given a forecast EUR140/t CO2 emissions allowance cost), causing cement prices to double. 

CBAM looks set to help the EU cement producers operate on a more level playing field, but the writing is on the wall. They will need to minimise carbon emissions to maximise profitability as well as protect their long-term financial viability, or else be punished by the cost of carbon.