Adapting to the new rules: How the CBAM will transform society

 Agile Advisors as a Carbon Border Adjustment Mechanism, Importers of goods into the European Union (EU) must begin disclosing the emissions hidden in their products when the Carbon Border Adjustment Mechanism (CBAM) is implemented in October 2023. They will have to begin paying for them starting in 2026.  Aiming to prevent EU manufacturers, who have been paying the price for their emissions under the EU's trading system, from being at a competitive disadvantage against imports from nations where carbon is not priced, the CBAM is the first mechanism to be adopted anywhere in the world. It will have far-reaching effects. The CBAM will rearrange international trade flows over the next five years or longer, depending on the industry. In the longer term, it will make other economies more inclined to reduce their emissions. Cramer opposes the connection between a border adjustment and a clearly defined domestic carbon price.

As a Carbon Border Adjustment Mechanism, Prices for products and commodities in the EU will likely be lower as the CBAM is completely implemented. Due to the possibility of gaining larger profit margins in the EU market, low-carbon manufacturers should be encouraged to invest in carbon-reducing technologies in exporting nations. Certain nations may also increase their current carbon taxes or implement their own. By 2030, the CBAM is anticipated to earn more than US$9 billion annually from all of its target industries. A portion of the money will be transferred to lower-income EU trading partners to encourage decarbonization efforts. At the same time, the remainder will go into the budgets of EU member states. Other nations can seize control of that revenue instead of letting the EU take it by imitating the EU and establishing a carbon price within their borders. In addition, the EU can negotiate agreements with other countries that could be considered an alternative to application of the CBAM.

Agile Advisors as a Carbon Border Adjustment Mechanism, But the CBAM has come under heavy fire from various quarters. China and India, among other nations, view it as a trade protectionist policy. Companies and governments fear that because it is difficult to monitor the emissions buried in imports, its implementation will be haphazard. Furthermore, there are doubts regarding its ability to promote low-carbon investment genuinely. To draw generalizable findings, we concentrate on three exemplary value chains: oil, hydrogen, and steel. Due to rising EU demand, the global ammonia and hydrogen sectors will be forced to decarbonize. As part of its Repower EU ambitions, the EU intends to produce and import 10 million tons of hydrogen produced by renewable energy annually by 2030. The CBAM will increase incentives and promote the importation of hydrogen and its low-carbon derivatives. Certain non-EU countries who participate in the EU ETS or have an emissions trading program linked with the EU ETS will be excluded from the CBAM system.

In our role as Carbon Border Adjustment Mechanism, while carbon-intensive hydrogen and its derivatives from low-cost feedstock countries might still be competitive in the EU, grey hydrogen will probably be redirected to other markets more and more. Fertilizers and ammonia will be essential components of low-carbon hydrogen initiatives. Since ammonia has some existing transportation and storage infrastructure and a higher volumetric energy density than liquid hydrogen (i.e., more energy can be delivered for the same volume via ammonia than in the form of liquid hydrogen), ammonia is employed as a hydrogen carrier. It is anticipated that conventional ammonia will be the top user of low-carbon hydrogen until the middle of the 2030s, at which point power will overtake all other users. The commission’s proposal is currently being reviewed by the European Parliament, which, along with the Council of the EU, negotiates final legislative packages.

 

 

 

 

Agile Advisors as a Carbon Border Adjustment Mechanism, For the foreseeable future—at least through 2050—fertilizers will continue to be the primary application for ammonia. The most financially advantageous method of producing grey hydrogen will no longer be possible with the introduction of the CBAM and the phase-out of free permits under the EU ETS. Grey hydrogen will ultimately cost more in terms of levelized cost of hydrogen (LCOH) than green hydrogen, which is created by electrolyzing water, and blue hydrogen, which is produced from natural gas with carbon capture, as carbon costs rise. Producers will have to find ways to produce hydrogen that emits less emissions, whether it is located inside or outside of the EU. The nations listed below and the cost breakdown by process are those that we predict will be significant hydrogen producers in 2036. The final legislation could therefore change from the commission’s initial proposal, including changes to the sectors covered under the CBAM and other key facets of its design.