New Zealand exporters could be impacted by carbon tariffs in Europe

Stricter climate ambitions in the European Union (EU) mean increased domestic production costs, and therefore higher prices, for carbon-intensive goods such as cement, iron, steel, aluminium, fertilisers, electricity and hydrogen. This increases the risk of ‘carbon leakage’, which occurs when EU companies move carbon-intensive production to countries with less stringent climate policies. While ‘carbon leakage’ reduces costs, it also means that EU products end up containing raw materials which are more carbon-intensive, or EU products are replaced with more carbon-intensive imports.

To ‘level the playing field’, the EU’s Carbon Border Adjustment Mechanism (CBAM) brings in tariffs for carbon intensive goods imported into the EU, with the aim of encouraging cleaner industrial production in non-EU countries.

There is a transitional period starting 1 October 2023 from when EU companies will need to report emissions embedded in their imports, but surrendering of purchased CBAM certificates only starts from 1 January 2026. The purpose of having a transition period is to give importers time to refine their methodology for determining embedded emissions.

There are two implications for New Zealand entities:

• Tariffs could result in reduced demand for carbon-intensive goods into the EU such as cement, iron, steel, aluminium, fertilisers, etc. because there will no longer be a price advantage
• European customers will need GHG emission data regarding imported products in order to measure the number of CABM’s to be surrendered, so impacted New Zealand entities will have to start measuring their GHG emissions now.

Measurement methodologies for emissions

Article 4 of the CBAM Implementing Regulation for the transition phase outlines the rules for calculating emissions during the transitional period. The table below shows permissible measurement methodologies for calculating emissions of goods produced in an installation.
 

Measurement methodology	Details	When?
Full EU methods	Determine emissions using either of the following methods: From source streams based on activity data obtained from measurement systems, and calculation factors from laboratory analysis or standard values, or From emission sources by means of continuous measurement of the concentration of the relevant greenhouse gas in the flue gas and of the flue gas flow.	Only method available from 1 January 2025
Three methods if they lead to similar coverage and accuracy of emissions data compared to the full EU methods	Determine emissions using either of the following monitoring and reporting methods: A carbon pricing scheme where the installation is located A compulsory emissions monitoring scheme where the installation is located An emissions monitoring scheme at the installation which can include verification by an accredited verifier.	Until 31 December 2024
If the EU reporter does not have all the specific activity data	May use other methods for determining the emissions, including default values made available and published by the Commission (standard value method).	Until 31 July 2024

To date, European importers may have been using the standard value method for calculating emissions, which could be done independently of foreign suppliers. As this method can no longer be used after 31 July 2024, European importers will need to engage with impacted New Zealand suppliers to obtain emissions data determined:

• Until 31 December 2024 using one of the three methods or the full EU method
• From 1 January 2025, using only the full EU method.

As the full EU method requires specific activity data from 1 January 2025, impacted New Zealand entities will have to measure their GHG emissions on this basis in order for European customers to comply with the Implementing Regulation after the transitional period.

For more on the above, please contact your local BDO representative.

This article has been based on an article that originally appeared on BDO Australia, read the original article here.