Strengthened EU carbon border tax feared to hurt local exporters

An HMM container ship / Courtesy of HMM

By Kim Hyun-bin

A move by the European Union to strengthen its carbon border adjustment mechanism (CBAM) is expected to hurt Korea's exports to the world's largest economic bloc, as more local exporters face the EU's carbon taxes, according to market analysts Monday.

The CBAM is linked to the EU Emissions Trading System (ETS) as a carbon-pricing system for imports into the region. It is aimed at adjusting the price of certain imported products to the amount of CO2 emissions incorporated, in order to equalize carbon costs between EU products and imports.

The International Institute of Trade, a research body under the Korea International Trade Association (KITA), released a report on Sunday titled, “Evaluation and Implications of the EU's CBAM Amendment,” pointing out that the CBAM amendment issued by the EU Parliament last December is aimed at strengthening regulatory levels.

The amendment expanded CBAM application categories. In the initial draft, CBAM was applied to five categories ― steel, electricity, fertilizer, aluminum and cement ― but the parliamentary revision process added four items ― organic chemicals, plastics, hydrogen and ammonia ― increasing the total regulatory categories to nine.

“The EU Parliament is expected to draw up a final draft within the first half of this year,” said Shin Ki-seop, a researcher at KITA. “It is not known how much the amendment will be reflected in the final bill, but it is necessary for the relevant industry and institutions to carefully evaluate the impact and come up with countermeasures as it contains contents that increase the burden on exporters compared to the initial draft.”

The research found that from 2019 to 2021 the five draft categories under CBAM regulations amounted to $3 billion annually, accounting for 5.4 percent of Korea's exports to the EU.

However, if the scope is expanded to nine items under the amendment, it will account for $5.51 billion, an increase to 15.3 percent of total EU exports during the same period, which is nearly triple what's in the draft, and will result in a heavier burden for related Korean industries.

In addition, the initial draft included only direct emissions, which are emitted during the production process of goods. But the amendment also includes indirect emissions, which will include greenhouse gases emitted during the generation of electricity for the production of goods.

As of 2020, when producing 1 kilowatt-hour (kWh) of electricity, Korea emits 472.4 grams of carbon dioxide, which is two to four times higher compared to advanced markets such as the EU which stood at 215.7 grams and Canada with 123.5 grams.

The amendment also aims for the full implementation of CBAM one year earlier, from 2026 to 2025.