Under current EU proposals for a carbon border tax, organisations exporting or importing carbon-intensive commodities and energy to the EU will only have until January 2023 to begin planning their processes for monitoring products’ carbon emissions.
The EU’s proposed carbon border tax will be paid from January 2026, but includes a transition period from January 2023, now only a year away. During the transition period, importers will not need to pay the carbon tax but will need to report on carbon emissions. The tax will be in the form of digital certificates importers must buy to cover the carbon dioxide emitted in production.
New carbon reporting
The tax can be reduced if the importer can prove, with verified information, that a carbon price has already been paid, meaning that data on carbon emissions will soon have a real monetary value for organisations and they will need better reporting from their global suppliers. This new carbon reporting will likely mean increased administration as organisations will need to calculate their products’ carbon emissions, have this data verified and connect it to the actual shipments arriving into the bloc.
Managing data alongside operations
Costs for importing carbon-intensive products such as steel, aluminium and chemicals are significant enough to make a difference to business decision-making; the tax is estimated to be worth €75 per metric ton of CO2, rising to €100/t by 2030. However, as this price will be calculated based on weekly auction prices in the EU carbon credit market, organisations looking to manage this risk and forecast its impact will need to monitor this market data too.
For organisations whose CTRM does not allow them to add carbon emissions to stock, or who have not begun to explore how carbon markets could be integrated into their technology, the time to solve this problem is now. Developing new CTRM functionality or undergoing a new project to add carbon management to your CTRM can take time, especially if you are creating your business process flows as well.
Carbon emissions and credits
Commodities businesses within the EU will also need to ensure they have the right processes in place to manage carbon emissions and carbon credit trading. Although markets already exist within Europe for trading emissions permits, many EU manufacturers have been receiving free carbon permits to allow them to remain competitive against imports, but these will be phased out alongside the new border tax.
Unless the industry decarbonises, EU steel producers could be paying around €11 billion annually by 2030, sums that businesses need to actively monitor and insulate against, particularly when they are determined by market activity. Organisations within the EU therefore need to not only be aware of and managing the border taxes for imported materials, they also need commodity management systems that allow them to monitor the carbon cost of transforming materials, allocate the cost to the correct stock and match carbon credits to actual emissions.
Other risks
On top of the disruption to operations caused by the additional administrative work, the carbon border tax could cause market disruptions. Buyers may find that the economics of current supply chains shift in future, and may look to source from more local, lower-carbon manufacturers if this becomes more cost-effective than importing from fossil fuel-dependent suppliers.
There could also be a political impact from raising the price of Chinese and other goods in the EU, and the potential for other jurisdictions to impose their own carbon border taxes; as the USA and Canada are currently considering.
All in all, there are many potential risks and many potential opportunities for businesses dealing with high-carbon commodities in the EU, and their global supply chains. And these are likely to spread to other countries and to less highly intensive carbon industries in future. There are several steps that organisations can take to prepare for the changes that are coming, from building supply chain resilience to monitoring political risks.
Preparing for disruption
One of the most important steps to take in preparing for these changes is to ensure process efficiency and transparency within your organisation. The best way to do this is to ensure your commodity management technology is suitable for your future requirements, even before these requirements are 100% certain, by incorporating as much flexibility as possible.
Good commodity management technology can help to reduce the administrative burden of the new taxes and carbon credits, allowing your organisation to move faster and respond better to change, whilst reducing the risk of errors. It also allows transparency and auditability so that your offsetting and reporting are easier to verify, and allows you to connect all your activities in one joined-up system so that your team have access to all the information they need to reduce risk, make the most of opportunities as they arise and make better decisions.
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