Key Facts:
- The Carbon Border Adjustment Mechanism (CBAM) is a new instrument with which the EU is extending EU emissions trading to goods imports. The CBAM was adopted by the European heads of state and government in July 2020 and confirmed by the European Parliament in 2021.
- Emissions certificate trading for imported goods will begin in 2026, when higher manufacturing costs, the reorganization of supply chains and higher compliance costs in the automotive industry can be expected in the long term.
- Initially, car manufacturers will only be affected indirectly via the supplier network and only directly in individual cases. However, the expansion of CBAM to all industrial goods in particular would have a major impact on the automotive industry.
- As early as October 2023, many EU importers will be required to submit quarterly reports on imported goods, CO2 emissions and CO2 levies already paid in the countries of origin.
Stephan Freismuth
Director, Tax
KPMG AG Wirtschaftsprüfungsgesellschaft
How the EU Emissions Trading Scheme works for goods imported into the EU
With the help of the Carbon Border Adjustment Mechanism (CBAM), the European Union wants to create a level playing field between product manufacturers in the EU and outside the EU and eliminate incentives for carbon leakage, i.e. migration to countries with lower decarbonization ambitions. These goals are to be achieved by obliging EU importers to purchase CBAM emission certificates as compensation for the CO2 emissions of imported goods.
The price of the certificates is based on the market value of a certificate from the EU Emissions Trading System (ETS). This means that CO2 emissions generated in the EU and outside the EU are treated equally and a level playing field is created.
CBAM certificate trading is due to start in 2026. As this is a complex system, only CO2-intensive goods will initially fall within the scope of application. These include cement, electricity, fertilizers, hydrogen, iron (including iron ore), steel, aluminium and goods made from these. By 2030, the scope of goods is to be expanded to include all industrial goods.
However, a transitional phase is planned from October 1, 2023, during which importers will have to prepare a quarterly CBAM report containing the goods imported in a quarter, the CO2 emissions they contain and the CO2 levies already paid in the country of origin. Further information on the features and hoped-for objectives of the CBAM are discussed in this blog post.
Everything you need to know about the CBAM at a click
We explain the CBAM and clear up misconceptions
Who is affected, what reporting obligations apply and to which product groups should the Carbon Border Adjustment Mechanism (CBAM) be applied? There are a number of false assumptions and myths surrounding the new regulation. We clarify and set the record straight. You can also read the blog post by our expert Stephan Freismuth.
CBAM and the importance of the automotive industry
The CBAM is expected to have a lasting impact on the production of goods by European industrial companies and foreign manufacturers. The question inevitably arises as to the extent to which German industry will be affected by the planned CBAM measures. It is particularly interesting to look at the automotive industry here, as it is by far the industry with the highest turnover and therefore the most important in Germany, with a total turnover of approx. 411 billion euros in 2021. The OEMs themselves are responsible for three quarters of this (approx. 318 billion euros), while automotive suppliers account for around one fifth.
One characteristic of the automotive industry is its raw material-intensive production processes: 26% of German steel demand comes from the automotive industry. In general, 55 percent of the manufacturing industry can be described as steel-intensive. With a 12 percent share of steel in intermediate consumption, the automotive industry also occupies an important position on the raw materials markets.
Strong impact of CBAM on the global automotive industry value chain
The economic impact of the carbon border adjustment mechanism on the German automotive industry can only be estimated at present, as the CBAM is the only instrument for reducing greenhouse gas emissions in the European Union to date. More precise statements on the concrete effects on the economy, industry and climate can therefore only be made in retrospect, after 2026 at the earliest.
However, individual assumptions can be made about the consequences of the CBAM: One possible effect is that manufactured cars will become more expensive due to the inclusion of input materials and components in the CBAM system, unless the global supplier industry participates in the green transformation and significantly reduces greenhouse gas emissions.
Iron, steel and aluminum imports from non-EU countries play a significant role for the European industry and have increased further due to the energy crisis that has not yet been overcome. In 2021, 47% of aluminium (6.7 million tons) and 26% of iron and steel (44.7 million tons) were already imported. The sharp rise in energy prices in 2022 is likely to give a further boost to manufacturers from non-EU countries with lower production costs.
The importance of these metals in the automotive sector is immense. For example, a vehicle with an unladen weight of one tonne consists of around 600 kilograms of steel and 90 kilograms of aluminum. For every tonne of steel produced, 1.8 to 2.5 tons of CO2 are emitted, while the production of one tonne of aluminum generates approx. 1.7 tons of CO2. The price advantage of steel and aluminum imported from non-EU countries is likely to decrease in the future due to the CBAM.
The price of emission certificates in the ETS currently stands at EUR 90 to 100 per tonne of CO2 and has more than doubled in the last two years. According to analyst surveys, the average certificate price is expected to remain fairly constant at less than EUR 100 per tonne of CO2 in the short term for 2024.
In the long term, the price could rise further with the introduction of the CBAM and the expansion of the ETS to the buildings and transport sectors. The gradual reduction in the issue of free emissions certificates will also contribute to this. A drastic increase in the price of raw materials such as steel and aluminum due to the CBAM is expected as a logical consequence in the long term - and it will particularly affect automotive supplier groups with a high production share of these materials (chassis, axles and structural parts).
CBAM as a driver for the realignment of supply chains and production methods
A significant increase in the CO2 price in the ETS may well lead to sharp price increases for end products in the automotive sector in the coming years, provided that the additional costs in production due to more expensive emissions certificates are passed on to consumers.
It is questionable whether these price increases will be so significant that they will lead to major shifts in customer demand. The effect of CBAM on the reorganization of supply chains in the automotive industry should not be underestimated insofar as German car manufacturers, for example, have already produced twice as many cars in non-EU countries as in Germany in 2021.
It can therefore be assumed that the CBAM should accelerate the transformation of the automotive industry towards lower-emission manufacturing methods and technologies. Although this changeover will be cost-intensive in the short term, in the long term the sustainable investments will certainly be worthwhile for car manufacturers due to the increase in the cost of CO2 emissions.
Among the many factors expected to drive decarbonization in the automotive industry are the use of green steel and modern production processes that enable weight and space savings in vehicles. It is expected that the CBAM will enable the circular economy - i.e. the reuse of secondary raw materials - to play an even greater role in decarbonization in the automotive industry than it already does today. For example, the amount of greenhouse gas emissions in steel production can be reduced by 60 percent through a solid circular economy.
Influence of CBAM on the use of raw materials in electromobility
A comparable reduction can also be expected in the overall production of electric vehicles. This can be accompanied by cost savings and lightweight construction measures can increase the range of electrified vehicles. In the long term, it is even conceivable that 97 percent of all emissions could be reduced without incurring additional costs. However, lithium-ion batteries will remain a field of action in the medium term when considering the overall CO2 balance. Lithium and lithium hydroxide fall into the "chemicals" category targeted by CBAM. No lithium is currently extracted within the EU and the recycling rate for lithium-ion batteries is only in the medium range. In order to reduce the dependence on imports of lithium hydroxide from countries such as Chile, Argentina, Australia and China, mass recycling processes for lithium-ion batteries will be necessary in order to recover as many battery components as possible and return them to the material cycle.
Importance of suppliers with regard to CBAM
CBAM reporting and pricing are very individual and complex. For this reason, the mechanism could meet the targets set in some sectors, but fail to achieve its objectives in other sectors of the economy.
For car manufacturers (OEMs) in particular, the CBAM effects, which are not yet fully foreseeable, entail additional uncertainties. Above all, it will be important to observe how CBAM specifically affects the various specialized automotive suppliers and to what extent they pass on the additional costs to the OEMs - because the role of suppliers in the automotive sector is now so important that they are largely responsible for car manufacturing: The "traditional" car manufacturers now only create around a quarter of a car themselves.
Suppliers are under intense pressure to decarbonize their production processes: two thirds of their new business depends on CO2-related criteria that OEMs tie to a contractual relationship with suppliers - in order to achieve their own sustainability goals. It is not uncommon for car manufacturers to demand that suppliers meet these sustainability requirements within 18 months.
Development of new reporting structures necessary
In addition, other compliance regulations (EU Taxonomy Regulation, Corporate Sustainability Reporting Directive (CSRD), Supply Chain Duty of Care Act (LkSG)) must be observed within the framework of CBAM. If the right measures are not taken in good time, there is a risk of legal and financial consequences (fines, procurement bans, measures ordered by the competent authority), negative publicity and the risk of reputational damage and liability cases.
All companies are faced with the task of having to fully record, evaluate and document any changes in their value creation network. They are therefore required to identify binding requirements and the individual impact in a risk analysis and to develop and implement solution-oriented processes on this basis. It is then necessary to check whether these processes are effective.
Action is needed - the exact impact of CBAM remains unpredictable
How exactly the CBAM will affect the automotive industry and whether the positive effects of greater technology and sustainability incentives will ultimately outweigh the potentially negative effects, such as higher manufacturing and supply chain restructuring costs, is questionable and remains to be seen. In any case, the mandatory fulfilment of binding compliance requirements poses further organizational and financial challenges for the automotive industry.
The success of the CBAM stands and falls with its specific political and economic design. This will only slowly develop during the transition phase that begins this October.
