[The Editors' Verdict] High Carbon Emissions Weaken Export Competitiveness

Following ESG (Environmental, Social Responsibility, and Governance), the European Union's (EU) announcement of the Carbon Border Tax has become a hot topic in the industrial sector. The Carbon Border Tax is a type of trade tariff imposed on carbon-emitting companies, introduced as part of the EU's carbon neutrality package announced on the 14th of last month (Fit for 55: reducing carbon emissions by 55% compared to 1990). If implemented, it will be the first-ever carbon border tax and could significantly impact export and import companies, drawing high interest not only from businesses but also from governments of related countries.

Why is the EU imposing the Carbon Border Tax? First, it is to enhance the effectiveness of carbon emission reduction. Since the Kyoto Protocol, the first climate agreement led by the United Nations (UN) in 1997, member countries, especially European nations, have been striving to reduce carbon emissions by imposing domestic carbon taxes. For example, Sweden imposes a carbon tax of 160,000 KRW per ton of CO2, Finland 100,000 KRW, and France 60,000 KRW, in descending order. However, if the increase in carbon emissions from non-member countries (or countries with exemption obligations) exceeds the reduction by member countries, the global net carbon emissions will inevitably rise each year. Therefore, the EU aims to successfully curb carbon emissions by leveraging tariffs that companies are sensitive to.

Second, it is to protect European industries. Frans Timmermans, Vice President of the European Commission, stated that "the Carbon Border Tax is a matter of survival for European industry," reflecting this intention. This is because the cost of reducing carbon emissions may lead to an increasing trend of European companies 'escaping Europe.' Third, the emergence of the Biden administration in the United States, which supports strong environmental policies and the Carbon Border Tax, cannot be overlooked. Considering the political stance of the U.S. Democratic Party, it is unlikely they will oppose the Carbon Border Tax, so the EU's position is to take the lead by preemptively addressing the issue.

So, how is the Carbon Border Tax calculated, and what are the target products? The tax amount can be seen as the product of the carbon emissions of goods imported into the EU multiplied by the price of carbon emission allowances (ETS) per ton. Here, the carbon emissions refer to the total direct emissions generated during the production process of the product (excluding indirect emissions), and the carbon allowance price is based on the trading price in the European carbon emissions trading market. Currently, the target products are limited to steel, aluminum, cement, fertilizer, and electricity. For perfect carbon emission reduction, all products should be targeted, but for complex products like automobiles, it is practically difficult to estimate the carbon emissions of raw materials and parts. Therefore, the initial targets are products for which carbon emission calculations are relatively easy and the carbon price proportion to production costs is high.

What about the implementation timeline and expected effects? According to the European Commission, the EU's executive body, the tax will be introduced in 2023, with a transition period from 2023 to 2025, and full tax imposition starting in 2026. The expected effects are, first, for Europe, imposing tariffs on imports will enhance the competitiveness of domestic companies and encourage the 'return to Europe' of European and multinational companies that had relocated overseas to avoid carbon taxes, leading to increased production and employment. Second, for countries outside Europe, the Carbon Border Tax is expected to have the intended effect of curbing carbon emissions. Additionally, it is anticipated to accelerate the development of carbon reduction technologies and devices.

Of course, other countries' opposition to Europe's Carbon Border Tax is not insignificant. Russia, which has a high proportion of electricity exports to Europe, has already criticized this measure as protectionism. However, considering that environmental issues are becoming increasingly serious, South Korea, ranked 8th in global carbon emissions and expected to face an annual Carbon Border Tax of 1.06 billion USD (1.2 trillion KRW) under current standards, must respond quickly and prepare thoroughly at both corporate and government levels.

Jeong Yushin, Dean of the Graduate School of Technology Management, Sogang University