World’s first carbon tax approved

To all Australian companies exporting carbon-intensive goods to the European Union - you may be facing a significant challenge in the near future. The EU's Carbon Border Adjustment Mechanism (CBAM) is coming into effect, and it will have a major impact on your business.

The CBAM is essentially a carbon tax on imported goods to the EU, and it will have a significant impact on Australian exporters. In this article, we'll explore what the CBAM is, how it works, and what Australian companies can do to prepare for it.

What is the CBAM?

The CBAM is a mechanism that puts a price on the carbon emissions generated during the production of carbon-intensive goods entering the EU. The aim of the CBAM is to reduce CO2 emissions outside the EU and create a level playing field for CO2 emissions globally. CBAM certificates will be issued for the system, which the importer will have to hand in according to the amount of CO2 emitted. Each tonne of CO2 emissions represents one CBAM certificate based on embedded emissions, which are the direct emissions released during the production of a certain product.

When does the CBAM come into effect?

The CBAM will initially apply to certain goods, including cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen, which are at the greatest risk of carbon leakage. During the transitional phase, which starts on October 1, 2023, importers will need to report greenhouse gas emissions embedded in their imports without making any financial payments or adjustments. However, the permanent system will come into effect on January 1, 2026, and importers will need to declare the quantity of goods imported into the EU in the preceding year and their embedded greenhouse gas emissions. They will then surrender the corresponding number of CBAM certificates based on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted.

What does the CBAM mean for Australian companies?

The CBAM will level the playing field for CO2 emissions globally, which means that companies exporting to the EU will need to consider the carbon footprint of their products. This will require a significant shift in the way that companies operate, with a focus on reducing emissions throughout the supply chain. Companies that fail to do so will be at a competitive disadvantage in the EU market.

What can Australian companies do to prepare for the CBAM?

There are several steps that Australian companies can take to prepare for the CBAM. Firstly, they need to calculate the carbon footprint of their products accurately. This involves identifying the direct and indirect emissions generated during the production of their goods. Companies can then use this information to make decisions about their supply chain, such as sourcing materials from low-carbon producers or investing in more sustainable production methods. Secondly, companies need to consider how they will comply with the reporting requirements of the CBAM. This will involve gathering and reporting data on greenhouse gas emissions embedded in their products. Thirdly, companies need to prepare for the financial impact of the CBAM. They will need to factor in the cost of CBAM certificates when pricing their products for the EU market.

What is the European Green Deal?

The CBAM is part of the European Green Deal, which aims to make Europe the first climate-neutral continent by 2050. From 2040, large industry will no longer receive new emission rights, a significant step that gives the industry two decades instead of three to become carbon neutral. The European Green Deal also includes a range of measures to reduce greenhouse gas emissions, including increasing the use of renewable energy, improving energy efficiency, and promoting sustainable agriculture.

Conclusion

The EU's CBAM will have a significant impact on Australian companies exporting carbon-intensive goods to the EU. To remain competitive in the EU market, these companies need to take action now to prepare for the CBAM. This includes calculating the carbon footprint of their products accurately, complying with the reporting requirements of the CBAM, and preparing for the financial impact of the mechanism. By taking these steps, companies can reduce their emissions throughout the supply chain and ensure that they remain competitive in the global marketplace. Ultimately, the CBAM is a step in the right direction towards achieving global carbon neutrality.

So, if you're an Australian company exporting carbon-intensive goods to the EU, it's time to take action. Doing so ensures that your business remains competitive in the global marketplace.