[CBAM Shock] Carbon Bills More Expensive Than European Firms Arrive... "Government Publishes CBAM Guidelines for Businesses"

"Enough Negotiation Opportunities... Active Response Needed"
EU-ETS Emission Permits Tripled Compared to 2 Years Ago
CBAM Revenue Invested in National Total Factor Productivity
"Government Must Actively Invest in Steel Technology Development"

The Ministry of Trade, Industry and Energy, the Ministry of Foreign Affairs, and the Ministry of Environment will publish a guideline for the implementation of the Carbon Border Adjustment Mechanism (CBAM) for domestic companies by the end of this month. At the recent 'Steel Korea 2023' hosted by the Korea Iron & Steel Association, Donghyuk Kwon, Executive Director of BNZ Partners, said, "The CBAM implementation guideline jointly prepared by the government is expected to be released by the end of this month," adding, "Our companies will be able to refer to detailed contents for responding to CBAM."

CBAM is a type of trade tariff that the EU plans to introduce under the pretext of reducing carbon emissions. Simply put, it costs money to reduce the carbon emitted during product manufacturing. It is disadvantageous to produce products in countries with strict carbon emission regulations. When goods are produced in countries with lax regulations and exported to countries with strict regulations, taxes are imposed accordingly to resolve the imbalance.

The Ministry of Trade, Industry and Energy established an inter-ministerial EU CBAM response task force (TF) in February this year and has been discussing consultation plans and response directions toward the EU. The EU will operate a CBAM transition period from next month until December 2025. Companies will collect carbon dioxide emission data for the fourth quarter from next month to December and submit their first report to the EU by the end of January next year.

Experts say, "The EU set a 'transition period' to first receive data from companies and leave room for later adjustments," adding, "There is still ample opportunity to negotiate with the EU, so companies should actively respond rather than accept everything as is."

Bang Moon-gyu, then Minister for Government Policy Coordination, is presiding over a meeting to review the response status to the EU Carbon Border Adjustment Mechanism (CBAM) at the Government Complex Seoul on December 13 last year.
[Photo by Prime Minister's Office] [Image source=Yonhap News]

First, there is a review of potential violations of the World Trade Organization (WTO). The EU declared that it would design CBAM in compliance with the WTO. However, experts point out some discrepancies. Executive Director Kwon noted, "The EU's Emissions Trading System (ETS) excludes small European companies from regulation, but EU-external small and medium-sized steel companies exporting to the EU must report emissions from all steel production processes in the CBAM declaration."

He also said, "CBAM currently requires purchasing certificates at the current EU-ETS emission allowance price, but EU steel companies may hold emission allowances that were over-allocated in the past or purchased at lower prices in earlier periods," adding, "It cannot be said that EU steel companies and offshore producers bear the same carbon costs." Currently, the emission allowance price in the EU is around 80-90 euros, but before December 2020, it was below 30 euros. According to official EU data, as of the end of 2021, surplus emission allowances in the EU-ETS amounted to 1.4 billion tons, nearly equal to the total annual emissions of Europe. Executive Director Kwon said, "If steel companies hold a significant portion of this 1.4 billion tons, implementing the system is like playing on a tilted field," and urged, "The government must continuously negotiate or inquire with Europe on these issues."

Professor Hongjong Cho of Dankook University, who attended the seminar on the same day, said, "Companies must submit and report all internal information such as carbon emissions, import prices, and final customers," adding, "There are issues of unfair practices." Professor Cho said, "It seems to be an attempt to completely overturn the concept of comparative advantage and free trade that we have held so far through carbon pricing," and expressed concern, "It is worrisome that legal verification of attempts to undermine the WTO system is being presented as if it is already complete."

The more we claim that we have paid carbon costs in Korea and get recognition, the less money we have to pay to Europe. The key is how far these costs will be claimed. Executive Director Kwon said, "Costs related to emission trading or climate environment charges attached to ETS costs seem likely to be accepted if claimed, but there are many ambiguous costs," adding, "Europe has not yet said whether these are acceptable or not, so a common goal for our industry is necessary." He added, "In addition to ETS costs, Korea can claim climate environment charges included in electricity bills, individual consumption tax on fuels, and transportation energy environment tax." Professor Cho also said, "The government must prove to Europe that we are paying carbon taxes and create measurable data," adding, "Since there are many costs related to carbon taxes, measures such as renaming all these taxes as 'carbon tax' should be taken."

[Photo by POSCO]

Experts unanimously agreed that systematic and meticulous government support is necessary. Professor Cho said, "The EU claims that CBAM revenues will be used for the EU's total factor productivity (an indicator showing how much technology level, management innovation, and institutions contribute to production)," adding, "The EU's idea is to use the money for domestic industry protection and invest in domestic technology." He continued, "Ultimately, the important point is that our government must actively invest in technology development to increase total factor productivity," warning, "Otherwise, this trade structure will be disadvantageous to Korea."

Executive Director Kwon said, "The export competitiveness of Korean companies will be determined by the difference in greenhouse gas emissions per ton of product produced (emission intensity, the total greenhouse gas emissions divided by sales) compared to EU and competing countries," emphasizing, "The key is to transition to low-carbon product manufacturing processes." He added, "The more greenhouse gases are reduced, the higher the export price can be, so CBAM could actually be an opportunity," and said, "Whether companies make efforts to reduce greenhouse gases on their own or receive government support to do so will determine the success of responding to this market."

The steel industry, which will be directly hit by CBAM, is also busy preparing responses. POSCO has been operating an internal task force related to CBAM since August last year, and Hyundai Steel and Dongkuk Steel Group are responding to export regulations by developing low-carbon products and acquiring overseas eco-friendly certifications. A steel industry official said, "Discussions should be held to exempt regulations mainly on steel products with a high export ratio," adding, "If 100 units are exported, even if 20 are affected, 80 should maintain stability to minimize the impact." Another steel industry official said, "In addition to CBAM, we are bearing enormous R&D costs and commercialization risks for carbon reduction," emphasizing, "Government financial support and realistic cooperation from financial institutions are urgently needed."