Based on reporting by Elif Kefeli.
The UK’s recognition of 16 overseas carbon-pricing schemes under its forthcoming Carbon Border Adjustment Mechanism (CBAM) is evidence that carbon policy is becoming increasingly embedded in the architecture of the global economy. The significance lies partly in the geography of the schemes. The UK list includes the EU Emissions Trading System, China’s national ETS, India’s Carbon Credit Trading Scheme, Japan’s GX-ETS, South Korea’s K-ETS and Australia’s Safeguard Mechanism, alongside systems in Canada, Chile, Kazakhstan, New Zealand, Singapore, South Africa, Switzerland and Taiwan. These are far from peripheral economies but rather represent major centers of industrial production, manufacturing and international trade.
It seem that an interconnected regulatory web is beginning to emerge around supply-side economies. A product moving through international supply chains can increasingly encounter a carbon price at multiple stages of its journey. The UK’s system explicitly recognizes this possibility. Traditionally, the fundamental variables governing supply-side economics have been things such as labour, energy, capital, transportation, taxation and access to raw materials. Carbon is increasingly being added to that list. Carbon policy is not about optics anymore but rather a measurable economic input into the cost of traded goods.
A tonne of steel, aluminium or another carbon-intensive industrial product is no longer defined economically only by its physical characteristics and the conventional costs involved in producing it. Increasingly, its competitiveness can also depend on where it was produced, how much carbon was emitted in producing it, which carbon-pricing regime applied, what price was actually paid, and whether that price is recognized by the importing jurisdiction. The UK rules illustrate how granular this process could become. Importers are not simply asked whether a foreign country has a carbon market. They must establish whether the embedded emissions of the particular goods were subject to a qualifying scheme and determine the effective carbon price that was actually paid. Carbon is moving closer to the core mechanisms of price formation.
Within this trajectory, carbon policy will cease to be a specialized component of environmental regulation and will become part of the infrastructure of international commerce. Ultimately what is observed is a carbonization of supply-side economics. Effectively, this means that the carbon characteristics of production become increasingly inseparable from the price, competitiveness and market access of the goods that sustain the global economy. Once major trading jurisdictions begin recognizing one another’s carbon-pricing systems, an incentive emerges for exporters to establish, document and ultimately reduce the carbon intensity of production because carbon performance increasingly affects market access.
FACS Perspective
At FACS we see this trajectory as a strong reason behind understanding carbon cost exposure, and making sure to internalize proper strategies to not just minimize carbon cost at the business level, but also to secure proper funding for the longevity that correct investments will bring.
Businesses can not afford to be passive about carbon compliance, nor can they afford to be absent-minded. Carbon policy at the national and international level is increasingly moving away from the elan of the voluntary carbon markets into hard-fact economics. Disregarding or underestimating carbon compliance can be a factor of risk that introduces cost into business operations at the short term, and sacrifices market access in the long term. To that end, businesses must have access to the proper tools to estimate and understand their exposure, be compliant, and plan for the future with innovative, effective tools, that are designed for a cutting-edge, forward-looking, and fast-paced carbon market.
This article is based on publicly available reporting by SteelOrbis. All rights, including copyright, remain with the original source.