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Carbon tax, guidelines (to date) for the companies

Methods, functionality and timeline of the carbon tax. From October 2023 (already a few weeks ago), the EU Council provided for certain obligations for European importers of certain products. From 1 January 2026, the carbon tax will be fully operational. At first, the regulation will only be applied to a limited range of goods with a high carbon intensive production: iron and steel products, aluminium, electricity. And also for the Digital Passport there are new developments on the way…

Is the economic protectionism returning? It is a question that arises cyclically and spontaneously.

Is the economic protectionism returning? It is a question that arises cyclically and spontaneously. Are the EU and US going to defend themselves against the Chinese (and other countries’) competition? Are there any signs of this? Few months ago, the President of the European Commission announced the launch of a trade inquiry into Chinese electric vehicles. Beijing accused the EU of a «protectionist act» and «unfair competition». This is an accusation that goes against the EU, especially if one thinks of what happened with the anti-Covid vaccines: the UK and the US imposed a total ban on exporting the serums, opposed to the EU, that remained the «pharmacy of the world». Are the green and digital transitions driving towards a new protectionism? The strategic autonomy in the industrial field promised by the President Ursula von der Leyen and carried out by the EU Commissioner for the Internal Market, Thierry Breton, has caused concern among many observers, fearing of a protectionist drift to what is happening in the United States. The EU is the weakest part between Washington (which brought on the table 370 billion dollars with the Inflation Reduction Act) and Beijing (which strongly supports its own companies).

The Russian aggression against Ukraine has forced the European Union to reconsider its trade and industrial strategies to reduce its dependency on anti-democratic (but not only) countries and to diversify its supplies, to avoid a recurrence of what happened with Russian fossil fuels. Now, it is the raw materials shortage, crucial for producing the batteries and microchips, to guarantee the autonomy and economic security. Since 21 September, it has been implemented the European Chips Act which with the aim of doubling Europe’s share of global market to 20% by 2030, and producing the most sophisticated and energy-efficient semiconductors in the EU.

But let’s focus our attention on the so-called carbon tax. In technical jargon, it is called CBAM that means Carbon Border Adjustment Mechanism, and in the next few years (or rather, months) most of the manufacturing companies will have to get used to this term. A system that aims to protect the climate and EU companies. There has been a long-standing debate on this topic. If there is a global climate crisis, then all countries of the world must play their part in reducing carbon emissions. But what happens if Europe imposes stringent rules and the other continents are not taking any measurements, just as it is happening right before our eyes? Isn’t there a risk that our companies will either move production elsewhere outside Europe or stop producing and rely more and more on imports? CBAM is specifically aimed to avoid such a scenario. “It will help to reduce global carbon emissions while ensuring a level-playing field between the companies”, is the synthesis made by the EU when presenting the new regulatory frameworks. A geo-economic approach similar to what we have illustrated above, the European continent that is defending itself against an unfair competition and social dumping from other countries.

Five acts, part of Fit for 55% package

The CBAM consists of five acts that are part of the “Fit for 55%” package. It is the practical implementation of the policies undertaken by the EU to reduce its net greenhouse gas emissions by at least 55% within 2030, compared to the levels reached in 1990, and to achieve a so-called climate neutrality by 2050. What is it about? Apart from the mechanism to reduce the import of highemission products, the five measures refer to the establishment of a Social Climate Fund (that will be used to finance measures to support households and micro enterprises affected by the rising prices) and the EU ETS directive, whose emission reduction targets have been raised by expanding the number of members. But let’s focus on CBAM, the new carbon tax: undoubtedly the measure that will have the biggest impact on the Italian manufacturing sector, particularly the mechanical engineering sector.

Sectors involved, obligations and “CBAM certificates”

Steel, aluminium, cement, fertilisers, hydrogen, electricity: at the beginning, CBAM will cover these sectors. The Regulation 2023/956, after being approved by the EU Council, has in fact, foreseen as of October 2023 (a few weeks ago), certain obligations for European importers of such products. Basically, they will have to monitor and report to the European authorities the numbers of climate-changing emissions embedded in these goods, generated to manufacture the products. This will initially involve only reporting data, but in the coming future it will also be necessary to pay something. The mechanism developed by the European authorities will in fact work in a similar way to the ETS system, the main EU market for carbon credits, limited so far to the energy-intensive industries, the energy production sector, the aviation sector and soon, to the maritime transport sector.

How does the ETS system work?

The ETS system works as it follows. The EU company has to comply with a limit on its carbon emissions: if it exceeds it, it has to pay, and this should push it to pollute less. In practice, every year the company receives (partially for free, partially by paying) a quantity of carbon credits: each title corresponds to the possibility of emitting an equivalent quantity of carbon dioxide. If the company doesn’t want to receive a fine, at the end of each year, the company must pay back a certain number of credits, that are sufficient to cover the emissions above the limit.

CBAM should be included in the future plans of the EU, as complementary to the ETS system (as we have seen above). It applies to those companies producing in the EU, which therefore have to face higher costs due to carbon credits. On the other hand, those who produce outside the EU borders are not affected by these costs. The compliance with the rules has objectively a cost. Here is the risk. Carbon-intensive production could be relocated to countries with less stringent climate policies. And imported products may prove to be cost-effective, obviously at the expense of the environment.

Therefore, the need to introduce “CBAM certificates”, corresponding to the carbon emissions embedded in the goods. To comply with the regulations, the importing companies will have to buy enough certificates from the EU Member States to cover the quantity of emissions incorporated in the goods they purchased outside the EU. The certificates will be issued and sold through a platform managed by the European Commission, which will be responsible for recording the price and date of sale of the acquired certificate. How much will it cost? It is not easy to predict, as the prices will be subjected to the market fluctuations. The cost of CBAM certificates will be depending on the weekly average auction price of EU ETS allowances, i.e., the system already used today by the European Union.

Increasing costs for European importers

There is no doubt that for those who mostly rely on non-European imports of certain products, their costs will increase, and so will the entire value chain. The CBAM looks rather like a sort of environmental import tax on steel and aluminium and consequently the perspectives for a free trade, free of barriers and bureaucratic constraints, are becoming increasingly unattainable from the European Union’s territory. On the other hand, it is true that currently a big part of the world does not have a carbon tax; as a result, companies producing in Europe are clearly placed in a competitive disadvantage.

The Regulation foresees two implementation phases:
• the transitional period, started on the date when the Regulation entered into force (1 October 2023) and will end on 31 December 2025. During this transitional period, will not be applied any levy to the imported goods, but will only collect information on the quantities of incoming products subjected to the CBAM, including the assessment of embedded emissions. At this stage, already underway, the competent national authorities started the authorisation process of the obliged parties (in Italy it is based at the Ministry of the Environment and Energy Security);
• the full scope, will enter into force on 1 January 2026, when the mechanism will become permanently operational. According to the Regulation, the first CBAM declaration, covering goods imported in the calendar year 2026, should be submitted by 31 May 2027.

In the initial period, these forecasts will be applied to a small number of goods whose production is carbon intensive: iron and steel products, aluminium, electricity.
During the first transitional phase that started on 1 October 2023, the operators identified in the Article 2 of the Implementing Regulation, Reg. (EU) 2023/1773, are required to collect the data on a quarterly basis and transmit them to the Commission: the first report, containing figures referring to the fourth quarter of 2023, should be submitted by the end of January 2024.

After this, starting from 1 January 2026, once authorised, these entities will have to declare annually the quantity of goods subject to CBAM imported in the previous calendar year and the embedded carbon dioxide emissions data. Therefore, they will have to issue a corresponding number of CBAM certificates, whose price will be calculated based on the average price of EU ETS allowances expressed in €/tonne. Obviously, being a measure under implementation, there will be needed more operational specifications, and implementation practices from the authorities involved.

The Digital Product Passport (DPP)

Every European consumption goods (even textiles) could soon have a real “digital passport” attesting its compliance according to specific European rules on circular economy, recycling, recovery and reuse. This is foreseen in a proposal for an European regulation to be considered by the Brussels institutions which will presumably revolutionize the design of the products on the market, making them as eco-friendly as possible. But to which products it applies, and how will the green and digital passport be assumed by the European Union? The EU digital passport will cover a large number of traded goods, in particular textiles and clothing, but excluding food, animal feed, medicines, veterinary products and motorized vehicles, for which there are already existing regulations for their design ensuring energy efficiency, for example. Eco-friendly design means producing goods designed to be long-lasting, efficient and easily recyclable.

It will certainly increase the number of goods that must be designed from the very beginning as “sustainable” by setting specific requirements of environmental sustainability and ensuring maximum transparency regarding the disposal of each product. The regulation text speaks of a common set of rules to make consumption goods not only more energy efficient but also for using less resources employed in producing them, as well as more sustainable, reusable, improvable, repairable and recyclable. The passport will also contain other information: the presence of hazardous substances in components that affect circularity, energy efficiency, recycled contents, carbon and environmental footprint and reporting requirements, are all elements that are asking a confrontation with the industrial world for having a “minimum” and transparent sustainable design criteria and most importantly for supporting them in taking more responsibility for the goods they produce.

Who needs a digital passport?

It will certainly help the consumer to make an informed choice on buying goods based on their recycling possibility. It will also serve as a tool for the controlling authorities to improve their checks on the lifecycle of the good or its eventual disposal and recycling.

Digital passport, implementation timeline hypothesis

The new rules for implementing eco-friendly goods and for their digital passport will not come into force soon: after the approval, it will serve at least 18 months until the economic players will be able to adapt to the production novelties, and two years for the States to organise the supervision and sanctions system. EU considers it essential to involve all market players: from the industry that produces the goods, to the end user, and up the recycling operator who takes care of its end-of-life. Because while a passport allows you to identify the good and its potential of remaining on the market and finding a “new life”, we need the commitment of the States and people to make that information transparent and easily available. And then decide its “destination” for recycling, reuse or destruction, only when the characteristics of the good really allow it. •

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