Can CBAM create a level playing field for CO2 emissions?

Can CBAM create a level playing field for CO2 emissions?
19 May 2023

This week, Eurostat released the EU cement industry statistics for 2022. There has been little change from 2021 when EU27 imports of cement and clinker totalled around 9.5Mt, but in 2022 imports rose above 10Mt for the first time. It is a rising trend that has continued to evolve since pre-2016, when clinker and cement imports to the EU27 totalled less than 2.5Mt. Meanwhile, cement and clinker exports from the EU27 have slumped from nearly 25Mt in 2016 to around 13Mt in 2022 with the UK and USA accounting for 39.9 and 25.1 per cent of current volumes, respectively.

These figures could see significant changes in the next few years. This is because the Carbon Border Adjustment Mechanism (CBAM) is soon to enter its transition phase from October 2023 to December 2025, when non-EU manufacturers will be required to report their CO2 emissions to trade with the EU zone. CBAM is a key part of the Fit for 55 package to achieve a 55 per cent emission reduction by 2030 from 1990 levels. The mechanism is initially set to cover iron and steel, cement, aluminium, fertilisers, electricity and hydrogen. A levy will be implemented from 2026 to 2034, meaning that EU importers will then have to purchase certificates equivalent to weekly EU carbon prices. 

While China and India are the powerhouses of today’s cement markets, their contribution to the European cement and clinker import market is minimal. China accounted for 0.2 per cent of imports in 2022, according to Eurostat, while India was not among the main countries listed. Turkey was by far the largest contributor with 43.7 per cent of the clinker and cement imports to the EU last year, followed by Algeria at 17 per cent and Ukraine at 9.3 per cent. The reaction of Turkish and Algerian exporters to the EU will be most keenly watched as the tariffs for CBAM come into force in 2026. A recent EBRD study assessed that CBAM payments will represent 50 per cent of the costs for cement, rising prices sharply. Any shortfall in supply might provide an opportunity for clinker lines in Europe to increase output. However, while producers in Spain and Italy, for example, have under-utilised clinker capacity, energy costs and CO2 emissions costs would impact higher production volumes. Therefore, it is hoped that CBAM will incentivise low-clinker cement production.

CBAM implementation and a level playing field
The implementation of CBAM is expected to have wider implications for cement markets worldwide, encouraging regulators in other jurisdictions to advance their plans for carbon market mechanisms. This would help avoid "carbon leakage", where EU companies move their production bases to countries with less stringent climate policies outside of the EU, and create a more level playing field.

In China, for example, the emission trading scheme (ETS) only covers the power sector. But there is a consensus among experts that CBAM might encourage China’s ETS market to grow. Presently, China’s power plants can largely offset their emissions with free allowances from the government. However, in March 2023, China’s Ministry of Commerce released a paper saying the government and enterprises should plan how to respond to CBAM. Plans had initially been made to add eight sectors to China’s ETS by 2025, these being iron and steel, non-ferrous metals, paper-making, power and aviation. The delay in incorporation has been because of poor emissions data, according to a report by Caijin. However, carbon analyst Song Yutong at Refinitiv suggests that CBAM could accelerate China’s establishment of systems and standards for emission-intensive industrial companies to account for their emissions.

The disparity between the costs for a power company releasing a tonne of CO2 in China as opposed to the EU is huge. In China the costs are less than US$9/tCO2e, but in the EU it is US$85/tCO2e. According to China Dialogue, an independent think tank on China’s environmental policies, the two-year period before CBAM’s introduction in 2026 could see Chinese authorities phase in paid allowances for companies to start paying for their CO2 emissions and thereby levelling the field with EU manufacturers. This would be important as "once the tax is introduced in 2026, the difference in the costs of emitting CO2 under the EU and China’s carbon markets will be felt directly,” says Chen Zhibin, senior manager at adelphi consult GmbH. 

Producing a level playing field will need international cooperation. Jong Woo Kang, Asian Development Bank principal economist, has called for an international framework on cross-border measures or a global carbon pricing mechanism. Mr Kang believes the call for a global approach to carbon pricing mechanism can only grow. This would “more effectively reduce carbon emissions and contain potential cross-border carbon leakages,” said Mr Kang.

A level playing field is critical to CBAMs success. CEMBUREAU is vehemently waving the flag for European cement producers and believes a strong CBAM will create a global level playing field on CO2. But CEMBUREAU also calls for further structural solutions for countries that export up to 50 per cent of their domestic cement production. “Looking ahead, we need to focus on CBAM implementation and its watertightness, to ensure the mechanism fully equates CO2 costs between EU and non-EU suppliers,” said Koen Coppenholle, CEMBUREAU’s CEO.

Published under Cement News