The EU Emissions Trading System (EU ETS) is a tool used by the European Union to reduce greenhouse gas emissions. It increases costs for EU producers, potentially leading them to import products or move production elsewhere. To address this, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), which requires importers to purchase certificates based on the emissions in their goods. The CBAM will enter into force in 2026, initially covering iron and steel, aluminium, cement, fertilizer, electricity, and hydrogen. Importers will have a transitional phase from 2023 to 2025, where they only need to report emissions. Failure to comply may result in higher emission costs. While initially not impacting Thailand significantly, Thai businesses should be prepared for potential expansion of the CBAM and global net zero trends. They can collect emission data, improve efficiencies, and prepare for stricter climate regulations.
What is the EU Emissions Trading System and how does it relate to CBAM?
The EU Emissions Trading System (EU ETS) is an important tool that the European Union (EU27) uses to reduce greenhouse gas emissions (GHG emissions). The EU ETS increases production costs for EU producers, therefore there is the risk that EU producers may decide to import products or move their production bases to countries where there are no costs, or lower additional costs, for emitting emissions which leads to the issue of carbon leakage. By design, EU ETS reduces its GHG emissions cap every year, and is progressively lowering the allocations of free allowances on GHG emissions that it had givento EU producers in hard-to-abate industries to help them maintain their competitiveness. As a result, EU producers are facing higher costs for their GHG emissions.
The EU introduced the Carbon Border Adjustment Mechanism (CBAM) Regulation to ensure an equitable carbon price between domestic EU products and imported goods. Importers to the EU must purchase CBAM certificates based on the volume of embedded GHG emissions in the imported goods. The price of CBAM certificates will be linked to the price of the EU ETS.
Recently, on 18 April 2023, the European Parliament approved the CBAM Regulation as a way to strengthen its climate measures and ambition.
Enforcement of the CBAM and impacts on exporters/importers
Businesses exporting products to the EU will have a transitional phase to prepare for the CBAM before it enters into force in 2026. The transitional phase will be from 1 October 2023 – 31 December 2025, and will include the requirement only to report on embedded emissions in imported goods. The CBAM will enter into force in 2026, and from this point, importers must report on their GHG emissions data and pay for their emissions through the purchase of CBAM certificates. The CBAM will initially cover the following product categories: 1) Iron and steel, 2) Aluminium, 3) Cement, 4) Fertilizer, 5) Electricity, and 6) Hydrogen. However, it is expected that the EU will expand the CBAM’s scope to cover other product categories. It is also worth noting that these requirements still need to be clearly defined and may be subject to change, and therefore must continue to be monitored.
If importers are not able to report on the embedded GHG emissions of their imported goods, they may have to pay higher emission costs than what they should have paid, as the reference for the embedded GHG emissions of that good may be calculated based on the GHG emissions produced by the worst-performing group instead.
The CBAM places pressures on producers/exporters to measure their GHG emissions and to make improvements to lower the carbon footprint of their production. If producers/exporters to the EU are not able to measure or reduce their GHG emissions, they may face the risk that their products are under less competitiveness, or negotiations with importers asking for lower prices.
Initially the CBAM will not affect Thailand in a significant way, given that the five CBAM product categories that are exported to the EU comprise a very small portion of Thailand’s total export value. Nevertheless, Thai businesses should be prepared, as the EU may expand the scope of goods covered under CBAM. Similarly, global trends in net zero will assume a greater role in Thailand, and Thai businesses should be prepared for such developments. They could start by collecting data on the GHG emissions of producing their products; implementing plans to maximize their process efficiencies andreduce emissions in order to remain competitive; and prepare for potentially strengthened climate regulations in the future