Stricter climate ambitions in the EU mean increased domestic production costs and, therefore, higher prices for carbon-intensive goods such as cement, iron, steel, aluminium, fertilisers, electricity and hydrogen. This increases the risk of “carbon leakage,” which occurs when EU companies move carbon-intensive production to countries with less stringent climate policies. While carbon leakage reduces costs, it also means that EU products end up containing raw materials that are more carbon-intensive or are replaced with more carbon-intensive imports.
To level the playing field, the EU’s Carbon Border Adjustment Mechanism (CBAM) creates tariffs for carbon-intensive goods imported into the EU, with the aim of encouraging cleaner industrial production in non-EU countries (for prior coverage, see the article in the July 2023 issue of Indirect Tax News).
A transitional period applies under the CBAM as from 1 October 2023 where EU companies need to report emissions embedded in their imports, but surrendering of purchased CBAM certificates does not kick in until 1 January 2026. The transition period gives importers time to refine their methodology for determining embedded emissions
There are two implications for Australian entities:
To level the playing field, the EU’s Carbon Border Adjustment Mechanism (CBAM) creates tariffs for carbon-intensive goods imported into the EU, with the aim of encouraging cleaner industrial production in non-EU countries (for prior coverage, see the article in the July 2023 issue of Indirect Tax News).
A transitional period applies under the CBAM as from 1 October 2023 where EU companies need to report emissions embedded in their imports, but surrendering of purchased CBAM certificates does not kick in until 1 January 2026. The transition period gives importers time to refine their methodology for determining embedded emissions
There are two implications for Australian entities:
- Tariffs could result in reduced demand for carbon-intensive goods in the EU, such as cement, iron, steel, aluminium, fertilisers, etc. because there will no longer be a price advantage.
- European customs will need greenhouse gas (GHG) emission data regarding imported products to measure the number of CBAMs to be surrendered, so Australian entities should start measuring their GHG emissions now.
Aletta Boshoff
BDO in Australia