The European Union Emissions Trading System (ETS) is the world's largest carbon market and recently underwent significant changes with the adoption of the new CBAM regulation, which stands for “Carbon Border Adjustment Mechanism." In short, the new ETS and CBAM regulations aim to let the manufacturer and consumer pay for the carbon emissions that the product/service causes [1]. Let's say you're a fashion company that makes jeans in Europe. Then you will have to pay for the carbon emissions that your factory causes.  

The CBAM is designed to level the playing field for European industries by imposing a carbon price on imports of certain carbon-intensive goods from countries that do not have equivalent carbon pricing systems. The goal of the CBAM is to incentivise the reduction of greenhouse gas emissions in the production of goods consumed in the EU and to encourage the adoption of low-carbon technologies by non-EU countries.

One of the main features of the CBAM is that it applies to a broad range of sectors. For example, these sectors include steel, cement, chemicals, aluminium, and energy-intensive industries such as paper and pulp. The CBAM will also apply to electricity imports from non-EU countries, which could have significant implications for countries that rely on coal-fired power plants to generate electricity.

The CBAM will be implemented gradually, with a “Phase 1" starting in 2023 and a “Phase 2" in 2026. During Phase 1, the carbon price applied to imports will be equivalent to the average carbon price in the ETS, which is currently around €30 per tonne of CO2. Phase 2 will see the carbon price increased to €40-€50 per tonne of CO2.

One potential concern with the CBAM is the possible “carbon leakage," where industries relocate to countries with weaker climate policies to avoid carbon tax. To address this concern, the CBAM includes provisions for “compensation" for certain industries deemed to be at risk of carbon leakage.

The new ETS and CBAM regulations have significant implications for small and medium-sized enterprises (SMEs). One of the main ways that CBAM will impact SMEs is through its impact on the price of imported goods. As mentioned earlier, the CBAM will impose a carbon price on imports of certain carbon-intensive goods from countries that do not have equivalent carbon pricing systems. Consequently, these imported goods' prices will likely increase because of the applied carbon price.

For SMEs that rely on imported goods, this could lead to higher costs and potentially lower profits. It's worth noting, however, that the CBAM includes provisions for “compensation" for certain industries are at risk of carbon leakage. 

On the other hand, the CBAM could also create new opportunities for SMEs within the EU. For example, the carbon price applied to imports under the CBAM makes domestically-produced goods more competitive. Consequently, this benefits SMEs that produce similar goods within the EU. Additionally, the CBAM encourages adoption of low-carbon technologies and practices by SMEs, which improves efficiency and competitiveness in the long run.

So will these new ETS and CBAM regulations only cost you money? No, there is an opportunity to gain a competitive advantage!

If you operate sustainably, you can sell your carbon certificates. Companies need to buy certificates from others to stay below their carbon threshold. In the last two years, the price of these certificates skyrocketed by 300%! Ultimately, the ETS and CBAM regulations also make it financially interesting to act more sustainable.

Nevertheless, we understand that these regulations are vague and leave you clueless. No worries if you are not sure on how to start becoming sustainable in line with these regulations. We are here to help!

Book a meeting with our LCA experts and see how to use the ETS and CBAM regulations to your advantage!