HIGHLIGHTS

•    There are fewer obligations than expected. It appears to be a measure to minimize the risk of major trading partners' backlash and WTO complaints.

•    In the pilot period from 2023 to 2025, no carbon border adjustment tax will be collected, and only the amount of emissions for the product will be reported. From 2026, the obligation to pay goes into effect, and the price of emissions is based on the EU-ETS price.

•    Until 2026, indirect emissions from power use are excluded from the calculation of emissions.

•    Taxes on carbon border adjustment can be discounted as much as the carbon costs paid through emission trading systems or carbon taxes within the country of origin.

EU CBAM at a Glance

•  The European Commission announced the Fit for 55 bill package on July 14, 2021. A final implementation plan for the EU Carbon Border Adjustment Mechanism (CBAM), one of the packages, is also unveiled.

Weaker than expected, but intensity will gradually increase 

•  Overall, the scope of obligations has been reduced compared to what was discussed so far. This appears to be a measure to prevent major trading partners from backlashing and filing a WTO complaint.

  - During the pilot period from 2023 to 2025, there is an obligation to report emissions, but there is no obligation to pay expenses.

  - During this period, indirect emissions from power consumption (Scope 2) is excluded from emissions calculation

•  During the pilot period, Korea sees no immediate impact, other than the administrative burden, which means the shock on export price competitiveness has been suspended until 2026.

•  The free allocation ratio applied to producers in the EU will also apply to imports, but the EU-ETS plans to reduce the 100% free allocation ratio allowed to the CBAM industry by 10% every year starting in 2025, until it is 0% by 2035.

  - Imported goods subject to CBAM will also be affected by the reduction of EU-ETS free allocation.

•  Scope 2 emissions have been discussed continuously, so despite being excluded during the pilot program, they will likely be included from 2026 and onwards.

Then, how should we prepare?

Emission trading is not always the best solution. Korea must ensure that carbon costs are actually paid within its borders…

•  To reduce CBAM costs, it is necessary to prove that carbon costs have been paid within the country of origin and that they have not been compensated or refunded during the export process.

•  It does not mean that exemption can be granted merely because Korea's emission trading system is in place, but that it can be reduced or exempted based on the actual carbon price paid by the company.

•  Under Korea's current emission trading system, even a company with large emissions rarely purchases carbon credits for a fee as more than 90% free allocation and excessive allocation are available.

  - The carbon credit free allocation surplus between 2015 and 2019 is 14.04 million tons for POSCO and 1.5 million tons for Samsung Electronics. This means that the emission allowance allocated by the state is higher than the actual emissions. Therefore, the cost paid by the two companies for emissions is 0 won, and the sale of carbon credits can rather result in profiting.

•  In order for companies to avoid having to pay carbon costs at the EU border, it is imperative that the actual carbon costs paid by companies are rationalized by reducing the total quota of the current emissions trading system and adjusting the free allocation ratio.

Reference

Shin Dong-yoon& Yeon Da-hye. (2021). “Project 1.5°C: Broken emission trading system... Companies that made money by emitting greenhouse gases.” Newstapa. 2021.03.11. web. https://newstapa.org/article/eRQBR

European Commission. (2021a). Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757.

European Commission. (2021b). Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a carbon border adjustment mechanism.