The European Union's Carbon Border Adjustment Mechanism (CBAM), which is expected to be completely operational in 2026, presents as a game changer for the European steel industry. Designed to tackle ‘carbon leakage’ - the risk of companies relocating their production to countries with less severe environmental rules, CBAM will impose a carbon tax on imported steel based on its embedded emissions.
Levelling the Playing Field: Countering Carbon Leakage
The EU Emissions Trading Scheme (EU-ETS) has undoubtedly reduce carbon emissions in the region. However, it also puts European steel producers at a cost disadvantage compared to their counterparts in less regulated areas. Currently, steel production in the EU generates an average of 1.3 tonnes of CO2 per tonne of steel whereas major exporters like China and Russia often exceed 2 tonnes. This disparity leads to higher production costs for European companies impacting their competitiveness globally.
CBAM aims to address this issue by imposing a tax on the carbon footprint associated with imported steel. By forcing importers to buy certificates reflecting the emissions difference, between their steel and the EU average, CBAM aims to create competition. The European Commission projects that CBAM could reduce carbon leakage in the steel industry by 29% by 2030.
Potential Benefits for European Steelmakers:
The implementation of CBAM can prove to be advantageous for European steelmakers in many ways:
Increased Competitiveness: With CBAM in place, it creates a fair playground for European steelmakers factoring carbon cost of imports. In 2022, nearly 23 million tons of crude steel was imported in EU, representing 20% of the total steel consumption. This can potentially lead to increased demand for domestically produced steel, boosting production volumes and profitability.
Incentivize Decarbonization - The average carbon intensity of steel production in the EU is comparatively lesser as compared to its global counterparts. The implementation of CBAM pushes exporter countries for cleaner technologies adoption, thereby increasing decarbonization efforts beyond the EU.
Improved Transparency and Collaboration: Adoption of CBAM will lead to a robust carbon accounting and reporting across the entire value chain. This transparency will foster collaborations between the European steelmakers and their competitors to develop low-carbon steel production technologies.
Challenges and Key Concerns:
Although CBAM provides an edge to European steelmakers, it also presents hurdles for the industry:
Additional costs for the Downstream Industry: Steel is an important element in numerous industries, from construction to automotive. Steel prices driven by the CBAM will translate into higher costs for the downstream manufacturers, eventually impacting their competitiveness and consumer prices.
Increased Administrative burdens: The implementation of CBAM will require a robust carbon footprint monitoring and verification system for the imported steel. This will create an additional burden for both importers and national authorities.
Global Trade Tensions: CBAM can potentially trigger trade disputes with countries who are major exporters with high carbon footprint or perceive it as protectionist. For Instance, China is the largest exporter of steel and it has raised concerns about the unfairly disadvantages for Chinese steel exporters. Transparency and fair implementation of CBAM according to the World Trade Organization (WTO) will be crucial in mitigating these trade tensions.
The Road Ahead:
The impact of CBAM on European steel market it multifaceted. Although it provides increased competitiveness and a push towards greener production, it presents challenges related to global trades and increased costs. This presents an opportunity for the steelmakers to embrace change and drive innovation in low-carbon steel production. The role and success of CBAM is ultimately connected to its ability to drive carbon emissions down in hard to abate sectors, while fostering a fair ground for both European and international steel producers.
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