Authors: Tim Figures, Marc Gilbert, Michael McAdoo, and Nicole Voigt

Climate change is posing various risks for the businesses; from disrupted supply chains to labor challenges, companies are facing difficulties at various fronts. The impact has forced regulators to take necessary steps to mitigate such risks which can result in increased compliance cost and also disrupt certain businesses which do not follow sustainable practices. One such major change in the global regulatory framework with far reaching implications is the recently proposed carbon border tax by the European Union (EU).

In the setting section of the current edition of the newsletter, we bring insights from a study which analyses how the EU proposed Carbon Tax on imports will impact the global supply chain and how the businesses can gear up to meet these regulatory demands.

Countries have used ‘carbon pricing’ - levying a charge for each metric ton of carbon dioxide emitted by industry - in their domestic climate and sustainability policies. The EUs carbon border adjustments mechanism, better known as carbon border tax, is unique as for the first time such norms will be applied on imports. This can affect the competitiveness of countries exporting to the EU and have high carbon intensity in their manufacturing processes.

The Carbon Border Tax will come into force in phased manner from 2026 and can redefine the global supply chain with a push for industries to bring down their carbon footprint. In the initial phase high-carbon input industries like steel, cement, aluminum, chemicals, and electricity will have to pay €75 per metric ton of CO2 emissions and this will be raised to €100 per metric ton by 2030. This can increase the material cost by 15% to 30% for carbon-intensive producers, such as China, Russia, and India.

How will it work?

Importers will have to purchase carbon import permits for each metric ton of CO2 brought into the EU through the imports. The tax liability will depend on the carbon intensity of the products being imported and the tax rate per metric ton. This will be the same as the domestic carbon price being paid by the EU producers. To avoid double taxation, goods imported from countries that have similar domestic carbon-pricing laws will be exempted, subject to agreement with the European Commission.

How companies should respond

The impact of the carbon border tax will affect producers, importers and end users differently. Businesses can use number of possible strategic options that can help them to mitigate the impact:

• If the impact is small, companies can either pass the increased cost to end users or split it with the suppliers


• Companies should use best available methodologies and processes to accurately calculate their carbon emissions.


• Establish internal processes for the procurement decisions to identify low-carbon suppliers to reduce the carbon intensity of production


• Invest in more efficient industrial processes that can help bring down the carbon intensity


• Analyze the production footprint to understand whether after the introduction of carbon border tax, off-shoring and production in low-cost geographies still makes sense as the production process in such locations might attract higher carbon tax.

 

Six key steps to winning the regulatory shift:

Companies must gear up to ensure that they comply with the various provisions under the new regulatory regime as and when it comes into force. They should take the following steps to survive and thrive in the changing regulatory environment.

• Analyze the exposure: quantify how the carbon border tax will impact your company across the value chain


• Understand the dynamics: Examine the carbon footprint by product line for your business, industry, and competitors to evaluate the relative exposure.


• Identify the levers: Identify a set of actions that your company can take to mitigate risks, lower costs, and gain advantage in the new regulatory regime.


• Define a resilience strategy: Establish priorities and moves to strengthen carbon compliance, such as preparing for new reporting requirements.


• Anticipate scenarios: Prepare the leadership for actions based on different scenarios and conditions.


• Shape the policy: The carbon border tax will be debated in the EU in the coming months. Evidences can be assembled to inform the forthcoming legislative debates.

 

We duly acknowledge the authors and Boston Consulting Group for this note on their study with the same title