As the EU looks for ways to reach carbon neutrality by 2050, a carbon frontier tax, or the “carbon border adjustment mechanism” (CBAM), is now on the agenda. Credit: Belga
After years of toying with the idea of imposing tariffs on imported goods that score poorly on sustainability, appetite is now growing in Brussels for a carbon tax, euphemistically dubbed a “carbon border adjustment mechanism” (CBAM) to avoid the negative connotations around taxation.
As French environment minister Barbara Pompili noted last week, Joe Biden’s election in the United States makes such a measure even more likely, as European policymakers hope to coordinate efforts on carbon pricing and carbon taxes with the new administration in Washington.
Ironing out the details of such a border barrier will be tricky, especially as it will need to comply with WTO rules. France has already declared that if a deal isn’t already secured, it will make a carbon frontier tax one of the priorities of its EU presidency in the first half of 2022. Given that the EU needs to take dramatic measures to hit its goal of carbon neutrality by 2050 and hopes that a border tax mechanism could bring in as much as €14 billion in revenue, it increasingly seems like it’s a question of when, not if, a border mechanism will be brought in.
Whenever such a scheme is finally implemented, however, it will radically disrupt a global trading system already shaken up by tariff wars and increasing protectionism. Carbon-intensive industries such as metals and cement are likely to be particularly affected and may see their competitive landscape shift completely, with companies who’ve already invested in reducing their environmental impact reaping the benefits while other firms lose their competitive edge.
Metal sector a particular focal point
A carbon tax would, directly or indirectly, affect the largest industries, but the most frequently traded sectors with high carbon intensities would be especially upended. Take, for example, a recent analysis conducted by BCG, which found that the global steel trade could be radically altered by the implementation of an EU carbon tax. For producers of flat-rolled steel, the levy could whittle away as much as 40% of added value—an additional cost which carbon-intensive manufacturers would have trouble passing downstream.
Ukraine and China, which have flooded the European market with cheap BOS-steel (Basic Oxygen Steelmaking technology) produced using carbon-heavy blast furnaces, would see their products’ costs compare less favourably with steel produced through more efficient means, such as electric arc furnaces. On the other hand, some firms are particularly likely to seize significant market share as a result of an EU carbon tax.
As ratings agency Fitch recently noted, Metalloinvest—the largest Russian iron ore producer – is especially well-positioned. Unlike many Russian industrial conglomerates, the company was not founded during the so called “loans for shares” process in the 1990s and was built by its owner Alisher Usmanov through combining assets on the private market. Metalloinvest already enjoys a competitive edge owing to investments in infrastructure and state-of-the-art technology, while its direct reduced iron production facilities provide significantly lower CO2 emissions compared to full-cycle Russian metallurgical plants.
In addition, the company has been modernizing its production in order to reduce its carbon footprint. As such, Metalloinvest became one of the first companies in Russia to sign a green finance agreement when it inked a $100 million sustainable development credit line with ING with a rate tied to ESG scores.
The heavier impact on the cement industry
The steel sector is not only one of the industries whose competitive landscape would be most thoroughly overturned by a carbon tax, it’s also likely to be one of the first sectors targeted by such a measure. In October 2020, EU senior officials floated the idea of rolling out the carbon border mechanism in the steel, cement and electricity sectors before gradually expanding it to include other industries.
If slapping a carbon border tax on the steel sector will give a leg up to particularly efficient steel producers outside the EU, implementing such a mechanism in the cement industry could push European cement producers to ramp up their development of low-carbon technologies. At first glance, it would seem as if European cement manufacturers would welcome a carbon border measure, given the industry’s warnings that 30% of the EU’s clinker potential might be shuttered by 2035 over a lack of competitiveness sparked by rising electricity costs and requirements linked to the Emissions Trading Scheme (ETS).
Major European cement players, however, have been consistently wary of a border tax on carbon, fearing that it would be accompanied by the phasing out of the substantial free carbon allocations allotted to the sector which have handed it windfall profits. From 2013 to 2020, the EU cement industry reaped an estimated €3.5 billion in overallocation profits—very little of which was reinvested in upgrading creaking infrastructure. Indeed, European cement manufacturers have consistently trailed behind their foreign competitors in the race to decarbonise.
Implementing a carbon border adjustment mechanism would give European cement manufacturers a bit of breathing space by slowing down imports from inexpensive yet inefficient producers abroad, but is unlikely to disrupt the Indian producers, including Dalmia Bharat and Ambuja Cements, which have taken a global lead on reducing carbon emissions during the cement-making process.
What’s more, if a border tax spells the end of free ETS allowances for European cement producers, those European companies which have made marginally more progress than their peers at greening their production could reap the benefits. Swiss giant LafargeHolcim has emerged as a clear leader and was the only European manufacturer to crack the top 5 in an environmental ranking of the world’s largest public cement companies. The company is hoping to open its first zero-carbon cement facility by 2030 and is running 52 alternative fuel projects across Europe to cut down on both its emissions and its CO2 certificate costs.
Steel and cement are two of the sectors likely to face the greatest upheaval whenever the EU finally implements a carbon border tax, but the ramifications of any frontier barrier will be felt downstream. The competitive landscapes of these industries could be turned on their head, with producers who have opted for next-generation efficient technology rapidly seizing market share, while manufacturers who have hung on to outdated infrastructure will find themselves under increasing pressure to adapt to new industry expectations.