(2 min read)
Shipping emissions – producing 3% of global emissions currently and rising to 10% by 2050—is a glaring challenge for both industry and national sustainability targets. With supply chain disruptions such as blockages in the Panama and the Suez Canals, ocean freighters are re-routed onto longer routes. To compensate for this increased transit time, container ships are speeding up and ceasing to “slow steam”, a CO2 emissions-saving strategy first practiced in the 1970’s. A mere 1-2 knot boost in speed is projected to blast 14%-28% more in emissions, pushing the sector’s GHG targets further out of reach.
Equalizing Carbon Costs
Ultimately, greater transportation emissions result in a greater total carbon price for the product, an uncontrollable outcome in the short term without the adopting alternative fuels or local product sourcing. A new policy emerging from the European Union (EU) aims to control one segment of international trade emissions, focusing primarily on direct and indirect emissions occurring within the production process. The Carbon Border Adjustment Mechanism (CBAM) took full effect in August 2024, requiring all exporters and importers to account for greenhouse gas emissions embedded in high carbon-emitting products such as steel, iron, aluminum, hydrogen, electricity, concrete, and fertilizer. Though reporting of carbon content and emissions is required through 2025, financial obligations are exempt until after the transition. Following full implementation in 2026, the purchase of a certificates to cover the carbon price associated with production is obligatory. In other words, exporters must undergo rigorous reporting and track all carbon content of the products with third-party verification. Importers, then, must purchase a certificate equivalent to the price differential had the products been produced under the EU’s environmental regulation and carbon pricing.
Global Trade Shifts
The policy attempts to prevent a concept known as “carbon leakage”, ie. moving production to countries with less stringent climate policies. The idea behind accounting for carbon costs in production is to level the playing field between EU producers and foreign competitors, giving exporters with lower-carbon technologies a competitive advantage in the market. While the policy incentivizes certain companies + countries to invest in green technologies and to adopt greener practices in order to remain competitive, it will also certainly cause an adjustment and reconfiguration of the supply chain to mitigate the CBAM costs.
International Reaction
As with any new legislation, it was not immune to mixed reactions and international criticism. Some critics view the CBAM as protectionist measure or a trade barrier, with the possibility of non-compliance with World Trade Organization (WTO) rules. Some countries and trade experts argue that it could lead to disputes and legal challenges within the WTO framework. Other see it as a necessary pain to combat climate change in a concrete way. Alternatively, some worry it’s not strong enough, citing greenwashing in production reporting or the shift, rather than reduction, of emissions. Regardless, the CBAM is but the beginning of a string of similar legislation. Countries like Canada, Australia, the UK, the US, and Japan are discussing this as well, albeit with less stringent and comprehensive ruling.
E.M. Wasylik & Associates has over 25 years of experience navigating the changing landscape of international trade relations. Whether your firm is affected by the CBAM from an importation or exportation perspective, EMW is here to help.
