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The 2023 CBAM regulation in the EU carbon pricing scheme will introduce a carbon cost for companies for the first time, bolstering the EU's climate strategy. There is an initial phase from 2024 to 2026 to ensure a smooth transition without harming the EU macroeconomy and competitiveness from the impact of the CBAM.
What is the CBAM regulation from 2023? Until now, certain European industrial companies have not been incurring carbon costs. But 2023, the EU introduced an important game-changer to bolster its climate strategy: the Carbon Border Adjustment Mechanism (CBAM). This makes many industries and installations need to take prompt action - they will begin facing carbon-related expenses for the first time because of the CBAM in the European Union. To make the transition smooth and not hurt the EU macroeconomy and competitiveness, there is a transitional phase from 2024 to 2026. Here is a guide on how the CBAM, the addition to carbon pricing policies in Europe, will impact companies and the strategies they need to adopt to prepare for it in the medium term.
As covered in our latest article, The Carbon Border Adjustment Mechanism (CBAM) is a policy tool designed to address carbon leakage and preserve the European industry competitiveness compared to regions with different carbon pricing mechanisms (or not having any). It aims to prevent companies from relocating production to countries with less stringent carbon regulations. The idea is to keep a healthy economy while maintaining the effectiveness of domestic carbon pricing schemes and supporting global climate goals.
CBAM works by imposing a carbon price on imported goods based on their carbon content. This price is intended to mirror the cost that domestic producers face under the domestic carbon pricing system. By internalizing the cost of carbon emissions in imported goods, CBAM aims to prevent carbon leakage and incentivize trading partners to adopt more ambitious climate policies.
Until now, some European companies were not covered by the EU Emissions Trading System (ETS) and so did not face direct carbon costs. However, with the implementation of the CBAM, these companies will begin to incur carbon-related expenses from 2026 on. Some manufacturers were not producing the primary materials used for their operations. Logically, they were not held accountable for the carbon emissions generated during the production of those materials - they were not under the EU ETS scope. On the other hand, within the same industry, other plants can be producing the primary materials needed to operate. In this scenario, manufacturers have been facing carbon costs. It is mandatory for them to purchase European Carbon Allowances and surrender them to the EU commission.
This created a disparity - within the same industry, depending on their operational choices, some industries had to purchase EUAs, and others did not. On the long run, this could jeopardize European competitiveness, should everyone decide to start importing goods to avoid carbon costs.
Moving forward, even industries importing materials will need to assess the carbon intensity of their products and pay the equivalent carbon costs. This will lead to a more level playing field, ensuring that all companies are responsible for the carbon emissions associated with their operations, regardless of whether they produce materials internally or import them. Some examples are:
What products are covered by CBAM?
As seen in our earlier article, imports of specific goods (associated with high carbon intensity and posing a risk of carbon leakage), will be covered by CBAM:
As a reminder, during our interview with CEM in EU's Managing Director, we shred light on how the EU ETS is bringing decarbonization efforts in the cement industry. Mr. Charbonnel explained that some of his company’s competitors have been producing their own primary material (in this case, clinker), and paying for and surrendering EUAs to the commision. On the other hand, Cem’ In’ Eu’ has been importing the clinker necessary for its operations and thus has not faced carbon costs until now. Below is a reminder of what he shared with us, explaining how the introduction of the CBAM is already impacting corporate financial modeling and sustainable strategies.
FB: So far, Cem’In’Eu’ has not been facing costs for carbon allowances. Indeed, in the cement industry, what falls under the scope of the EU ETS is the production of the abovementioned primary material - clinker. Since Cem’ In’ Eu’ is buying clinker from abroad and processing it to make cement (instead of producing clinker themselves), we have not been required to purchase carbon allowances.
FB: In 2023, the EU regulators introduced the Carbon Border Adjustment Mechanism (CBAM). The idea is to make industries pay for the carbon emitted during the production of materials that they are importing. In other words, Cem’ In’ Eu’ has been buying clinker from outside of the EU without incurring carbon costs so far. After the introduction of the CBAM after 2026, we will need to buy carbon allowances to match the CO2 produced during the production process of the clinker in question.
FB: Cem’ In’ Eu’ is anticipating the cost that they will need to face to buy European Union Allowances (EUAs) after 2026 to match the carbon relative to the clinker needed for our operations. We are already incorporating the cost of carbon in our financial models and projections. For a 2026-2028 horizon, we are foreseeing a cost of carbon of EUR 140 rising up to EUR 160, representing 20% of our business turnover by 2032.
During the transitional phase (2024 -2026) before the full implementation of CBAM, companies should take the following steps:
As indicated in the checklist above, it is crucial for companies to consider the financial ramifications of their carbon allowance purchases. EUA prices are forecasted to rise and carbon costs can quickly become a heavy line on a corporate expense sheet. It is advisable for them to develop models to predict carbon allowance prices with different scenarios for the upcoming years (particularly post-2026 when the Carbon Border Adjustment Mechanism (CBAM) enters its effective phase after the transitional period). Companies can either create their own forecasts or rely on documentation from carbon market analysts to stay on top of market developments. You're welcome to subscribe to our newsletter to read our coverage of climate-related matters, or send us an email if you're interested in receiving our monthly updates on carbon markets prices.
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