Will your business be ready for the Carbon Border Adjustment Mechanism?
With 2023 approaching, transitioning to the Carbon Border Adjustment Mechanism (CBAM) is about to start. Over time Australian companies will be impacted.?
For companies who export their goods to other countries, be prepared to face carbon adjustment pricing at EU borders. It won't happen overnight but it's on the way.
Which is why in this newsletter we’ll discuss what CBAM is, and how this mechanism will directly impact Australian businesses.?
What is the Carbon Border Adjustment Mechanism (CBAM)?
Carbon Border Adjustment Mechanism (also known as border carbon adjustment or border tax) is a climate measure designed to minimise carbon leakage and support the EU’s goal of being carbon neutral by 2050.?
CBAM’s goal is to provide more structure to a market that is still looking to define itself at a larger scale. By imposing a carbon tax on imports via the CBAM, the EU hopes to make external changes within other countries.
As a result, there will be greater carbon price equality between domestic products and imports, and ensure EU’s climate objectives aren’t negatively impacted by production relocating to countries where climate protection measures are less of a priority.
For example, Germany is part of the EU, and a carbon fee is added to the production of iron due to the emissions involved and to incentive the implementation of local low emission steel production solutions. However, in countries like Australia who aren’t part of the EU, they don’t have to pay a? carbon fee, which makes producing iron cheaper. Thus, German companies could? import iron from countries like Australia who are outside of the EU, accessing? cheaper priced iron. There would be a detrimental effect to? the German producer for implementing low emission steel technology. Which is why the EU is mandating CBAM to non-EU companies.
By integrating CBAM, this will help reduce carbon leakage — the increase in emissions when an industry relocates from a country with strict climate rules to a country with lenient rules that attempt to control emissions.?
In addition, over time the CBAM model will be supported by more and more countries that are closer to net zero to protect their local businesses? against lagging countries.?
What sectors will CBAM cover??
Initially, CBAM will impact the following carbon-intensive industries, including:
These sectors are known for their high risk of carbon leakage, and high carbon emissions. Within these industries, CBAM applies to direct greenhouse gas emissions that are emitted during production processes.
If you think about the products exported from Australia that have use components of the above targeted industries, the issue is significant.
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Current state of CBAM: Transition Phase?
Between 2023 to 2025, EU countries will start the transition phase of mandating CBAM. During this transition, a reporting system is used to collect data and facilitate dialogue with non-EU countries. Plus, transition from a system of free allowance to the use of CBAM.?
After the transition phase, CBAM will begin and importers would need to pay carbon price with the financial adjustments made.?
How will this impact Australia??
With Australia being the 20th largest export economy in the world, the country economically relies heavily on exporting as an income source—thus, CBAM could significantly impact Australia’s economy.?
Take iron ore for example, which is among Australia’s top exports, worth roughly $80 billion. With CBAM implemented, carbon prices will be based on the amount of carbon emitted. With a significant amount of iron being exported, businesses could be paying millions of dollars to offset the prices to EU countries that they want to export too.?
However, the EU isn't the only section of the world that is supporting CBAM. Other countries such as Canada and Japan are also planning similar initiatives. While Australia currently is not mandating carbon prices, this will also impact businesses who rely on exporting goods to other countries.?
So, what does this mean for your company??
While some companies won’t be in these sectors, CBAM will indirectly affect your business too… As many businesses will need resources to create products or operate their factory, grow produce, warehouse, or cold store. And so with CBAM’s carbon prices, the cost to operate will significantly increase.?
Needless to say, change is coming as we enter 2023. The sooner your business engages with the net zero narrative and start making a net zero plan, the sooner you can understand the risks evolving and stay one step ahead. Need help creating a plan to achieve net zero? At Carbon Offset Advisory, we’ve helped dozens of companies achieve net zero through our proven five-step tailored process.?
We can help you reach net zero before carbon emission mandates both domestically and internationally affect your business.
If you’re interested in our help structuring your business to protect your profits in the face of these climate mandates, comment “CBAM” below and I’ll reach out to schedule a call with you.
To stay up to date with Australia's progress to net-zero and how this impacts your business, please subscribe to this newsletter.
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