Carbon Tax is here — and Carboledger is playing a crucial role by enabling carbon data sharing
Tax is an instrument to incentivise human behaviour. It is a simple logic for people to avoid goods which are taxed high, and purchase goods that have lower taxes. Tax policies are therefore key elements in shaping collective behavior of the society and when rightly used, it can have a positive impact.
Carbon tax can be considered a similar instrument to incentivise human or enterprise behaviour to engage in more activities that have positive impact on the environment. An example of what is called to be first of it’s kind is CBAM or Carbon Border Adjustment Mechanism.
Some context
The Eurpoean Union has introduced CBAM to have a carbon tax on imported goods to encourage low-carbon production in non-EU states. It is designed to be compatible with WTO-rules and the price on carbon will be equivalent to price of carbon in EU region to maintain fairness for organisations.
Border adjustments have the potential to increase the environmental effectiveness of climate policies, by averting shifts in economic activity that could lead to higher total greenhouse emissions. They are also seen as a way of protecting industrial competitiveness by reducing the incentive for businesses to move production abroad to evade local carbon taxes.
What are some of the goods which will have CBAM applicable?
The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage. cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.
For organic chemicals and polymers, which were previously included in draft CBAM regulation approved by the EU Parliament in July 2022, the implementation was postponed and decisions with this respect will be taken during the interim period (by 2026). Inclusion of polymers and organic chemicals into the CBAM scope would be very important for Middle East producers, since many oil and gas downstream products would be in scope.
Timelines
CBAM will eventually — when fully phased in — capture more than 50% of the emissions in ETS covered sectors. Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.
During the transitional phase of CBAM (October 1, 2023 — December 31, 2025), there will only be a requirement for the quarterly reporting of the greenhouse gas footprint of certain products imported to the EU, including direct and indirect emissions
Once the permanent system enters into force on 1 January 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026–2034.
Under the proposal, the CBAM would be introduced in a transitional period from 2023 to 2025. During this period, a reporting system would apply to importers of covered goods to facilitate a smooth rollout of the program, gather data, and to facilitate dialogue with non-EU countries.
Under the program, importers would be required to purchase certificates equal to the total embedded emissions of the covered good each year. The price of the CBAM certificate would be based on the weekly average auction price of EU ETS allowances. If a non-EU producer can show that they already paid a price for carbon emitted during production of the imported good, then that price could be deducted for the importer.
What are CBAM Certificates?
Starting 2026, there will also be a requirement to purchase CBAM certificates to cover the GHG footprint, and the price of CBAM certificates would be linked to carbon prices at the EU ETS. CBAM would represent an additional cost related to export to the EU market, which would in the end of the day be shared with the exporter or producer and could influence their marketing strategy. There are expectations that other countries may also implement measures similar to CBAM.
What is the methodology to be used for calculating emissions to calculate the tax?
During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime.
It should be noted that CBAM reporting requires GHG data per product and not per installation. Verification should not be required during the interim period, however starting 2026 verification requirements would come into force.
Importers would calculate the embedded emissions of their goods according to established EU methodologies and would need to independently verify their calculations. Embedded emissions (expressed in metric tons of carbon dioxide equivalent) are the direct emissions released during the production of goods. The method for calculating embedded emissions will vary by the type and complexity of good. If the actual direct emissions data is not available, then importers will be allowed to use default values for determining embedded emissions in the good. Where feasible, default values for goods will be set at the average emission intensity of each exporting country and for each covered good except for electricity. Actual emissions data could only be used under narrow circumstances for electricity because of technical and market challenges.
Is there any similar policy in other regions?
In the US there is a draft Clean Competition Act (CCA), the earlier version of which was issued in July 2021 and the later in July 2022. There are significant differences between the CCA and CBAM, some of them outlined below. CCA includes 25 sectors, such as petroleum, natural gas, fertilisers, iron & steel, glass paper and others. The proposed carbon price is 55 USD per ton of CO2 with an increase each year. The tariff would be payable on the difference between the actual emission and the US baseline emissions.
CCA proposal is still at early stages of discussions. Apart from that, there is information on draft conceptual proposals in the US regarding import tariffs on steel and aluminum based on how much carbon the producing country’s industries emit.
Importance of cross-border emissions data sharing
For effective calculation of taxes, what organisations need is an effective way to share data with their customers, and collect data from their suppliers. European importers will require to disclose the carbon intensities of products purchased and this would require the suppliers of these goods to calculate these emissions and share it with their buyers across global borders meeting various regulations.
Emissions data carries confidential information and hence it is important for organisations to share only useful data masking other aspects that can be trade secrets. This is where Carboledger network is of essence for companies to share and collect product carbon intensity data to accurately understand their emissions and perform carbon tax related calculations.
Majority organisations today rely on estimated data for emissions calculation, which leads to overestimation and hence lead to unfair tax payment. By accessing accurate data from Carboledger network, organisations can understand their taxes accurately and save costs on external verification.
Curious to learn more? Visit us at www.carboledger.com
