The push to decarbonise international trade

In July, the Euro­pean Com­mis­sion pro­posed the world’s first sys­tem of car­bon tar­iffs, the Car­bon Bor­der Adjust Mech­a­nism (CBAM). The new tax is part of a rapid­ly devel­op­ing pri­or­i­ty for busi­ness­es: the decar­bon­i­sa­tion of inter­na­tion­al trade. 

CBAM is a tax on car­bon-inten­sive prod­ucts like steel, alu­mini­um, cement and fer­tilis­er, part of the EU’s strat­e­gy to cut green­house gas emis­sions by at least 55% by 2030. The sys­tem is designed to lev­el the play­ing field for Euro­pean com­pa­nies. 

Cur­rent­ly, many EU man­u­fac­tur­ers must buy per­mits to cov­er the car­bon emis­sions they cre­ate. How­ev­er, much of the rest of the world – includ­ing Chi­na, Rus­sia, Turkey and the US – don’t face the same emis­sions rules, allow­ing them to export to the EU at much low­er costs. CBAM would change this by hold­ing importers respon­si­ble for these green­house gas emis­sions, just like domes­ti­cal­ly pro­duced prod­ucts.

The mech­a­nism is also designed to staunch “car­bon leak­age”, when goods that would nor­mal­ly be pur­chased local­ly are import­ed from coun­tries that don’t have the same reg­u­la­tions and are there­fore cheap­er. This leak­age also occurs when local com­pa­nies move their pro­duc­tion to anoth­er coun­try to avoid hav­ing to cut their emis­sions. 

The UK has a sim­i­lar car­bon pric­ing mech­a­nism to the EU, so the charge is unlike­ly to apply, at least ini­tial­ly.  How­ev­er, the new tax is cer­tain­ly cause for thought for UK busi­ness­es that trade with the bloc. 

Carbon taxes

CBAM has already proved con­tro­ver­sial. Crit­ics argue the sys­tem is lit­tle more than eco­nom­ic pro­tec­tion in a green cloak, which penalis­es devel­op­ing coun­tries that don’t yet have the tech­nolo­gies to cut their indus­tri­al emis­sions.

How­ev­er, it’s part of a grow­ing trend, join­ing such ini­tia­tives as the Task Force on Cli­mate-relat­ed Finan­cial Dis­clo­sures (TCFD), with its mis­sion to improve the report­ing of cli­mate-relat­ed finan­cial infor­ma­tion. The EU also oper­ates the Non-Finan­cial Report­ing Direc­tive, which can man­date com­pa­nies to look at their cli­mate risks and oppor­tu­ni­ties, along with a range of oth­er dik­tats aimed at strength­en­ing due dili­gence along sup­ply chains.

Jamie Pit­cairn is a tech­ni­cal direc­tor at Ricar­do Ener­gy & Envi­ron­ment, an engi­neer­ing and envi­ron­men­tal con­sul­tan­cy, which helps coun­tries devel­op their car­bon reduc­tion plans.

Car­bon tax­es, he says, are one of the reg­u­la­to­ry tools that most coun­tries are using to cre­ate their Nation­al­ly Deter­mined Con­tri­bu­tions (NDCs), com­mit­ments made as part of the Paris Agree­ment on cli­mate change. As a result, he says, tax­es are only going to increase in num­ber and cost.

Busi­ness­es must try to insu­late them­selves from these changes, Pit­cairn advis­es. “There is going to be sub­stan­tial change in the mar­ket dri­ven by cli­mate change … Exporters will need to be a lot more aware and informed.”

In the push to make prod­ucts as low car­bon as pos­si­ble, Pit­cairn expects to see a reduc­tion in the move­ment of goods and raw mate­ri­als, as com­pa­nies try to cut the car­bon impact of trav­el, as well as more on-shoring and a greater empha­sis on local sup­ply chains.

Busi­ness­es are also start­ing to look more close­ly at emis­sions, which are bro­ken down into dif­fer­ent “Scopes”. Scopes 1 and 2 cov­er a company’s direct and indi­rect emis­sions and are rel­a­tive­ly easy to cal­cu­late. But to have a valid net zero strat­e­gy, busi­ness­es must also con­sid­er Scope 3: emis­sions in their sup­ply chain.

“What we are see­ing now is glob­al man­u­fac­tur­ing busi­ness­es look­ing at their sup­pli­ers all round the world and ask­ing them for data on their car­bon emis­sions and using this as a basis for pro­cure­ment and future busi­ness,” Pit­cairn says. “It’s no longer suf­fi­cient for that busi­ness to make a prod­uct, sell it, and then for­get about it.”

Going circular

Anoth­er key leg­isla­tive change across Europe are “Right to Repair” laws, which require man­u­fac­tur­ers of elec­tri­cal goods to make their prod­ucts repairable for at least 10 years. Europe also has a sys­tem of Envi­ron­men­tal Prod­uct Dec­la­ra­tions (EPD) that are effec­tive­ly a product’s foot­print and a sign of the man­u­fac­tur­er’s com­mit­ment to reduce its envi­ron­men­tal impact. 

Accord­ing to Nico­las Lock­hart, a part­ner on glob­al arbi­tra­tion, trade and advo­ca­cy at the law firm Sid­ley Austin, reg­u­la­tions around the cir­cu­lar econ­o­my – espe­cial­ly what hap­pens at end-of-life – aren’t far off, and could make a big­ger con­tri­bu­tion to green trade than mech­a­nisms like car­bon bor­der tax­es.

“The day is com­ing when coun­tries won’t allow the import­ing of prod­ucts which don’t for instance come with a full life­cy­cle analy­sis,” he says. 

Laws that pro­mote longer prod­uct life, clear­er guide­lines around prod­uct design and an infra­struc­ture for recy­cling will cre­ate the incen­tives that com­pa­nies need to invest in R&D. 

This inno­va­tion can help to future-proof exports, says Lock­hart. Last year he worked with the World Eco­nom­ic Forum (WEF) and came across com­pa­nies, par­tic­u­lar­ly in elec­tron­ics and plas­tics, whose ambi­tions were far greater than those of many gov­ern­ments.

Some of this was con­sumer-dri­ven, with com­pa­nies under pres­sure to meet cus­tomers’ desire to know how prod­ucts are made. But much of this R&D was also based on “per­cep­tions of where the mar­ket is going”, Lock­hart says.

Com­pa­nies are plan­ning and look­ing ahead, he adds. Some will have seen the flip­side to the push for green­er inter­na­tion­al trade: the devel­op­ment of mar­kets for pre­mi­um prod­ucts, sold at a pre­mi­um price.

In August, for instance, the first batch of green steel left a fac­to­ry in Swe­den bound for the truck-mak­er Vol­vo. It was forged using a mix­ture of renew­able ener­gy and hydro­gen to cre­ate the intense tem­per­a­tures need­ed. Tra­di­tion­al steel pro­duc­tion uses coal and coke, and accounts for around 8% of all glob­al green­house gas emis­sions.

Coun­tries with strin­gent cli­mate change tar­gets need such inno­va­tion, says Pit­cairn, and they’re pre­pared to pay for it. As Net Zero pledges grow, “mar­kets will be much more cli­mate-aligned … trade is def­i­nite­ly going to be impact­ed but poten­tial­ly in a good way.”