In a recent Wood Mackenzie Horizons report titled “Playing by New Rules: How CBAM Will Change the World,” the Carbon Border Adjustment Mechanism (CBAM) is highlighted as a significant policy that will accelerate global decarbonization efforts while leading to substantial price increases across various sectors. The CBAM, set to be enforced by the European Union (EU), will require foreign producers of goods entering the EU to pay an emissions levy.
The report focuses on three key industries: oil, steel, and hydrogen, providing insights into how this mechanism could reshape global trade and its impact on EU consumers. It emphasizes that countries with existing carbon pricing measures and less carbon-intensive commodities will gain a competitive edge, potentially resulting in a major reshuffling of trade flows over the next decade.
The steel industry is expected to be one of the first to experience the effects of the EU’s CBAM. Iron and steel production within the EU accounts for 6% of total emissions, and the policy will pressure both domestic and foreign producers to invest in lower-emission technologies. By 2034, the CBAM could raise the cost of steel imports into the EU from key exporters by over $275 per tonne, with Chinese and Indian producers potentially facing increases of 49% and 56%, respectively.
Levelised Cost Of Hydrogen
The report also highlights opportunities in the EU’s low-carbon hydrogen market, where the CBAM is expected to incentivize imports of low-carbon hydrogen and its derivatives. As carbon costs rise, traditional ammonia production will likely transition to low-carbon hydrogen.
While the oil value chain is not initially covered by the CBAM, the report anticipates its inclusion by 2028 and full coverage by 2036. This could benefit oil-producing countries with lower carbon-intensive reserves, such as the US and Middle Eastern nations, while diverting trade flows away from West African countries and Russia. Consumers in the EU can expect oil and gas prices to increase, potentially adding up to $5 per barrel and 30 euro cents per liter at the pump upon full CBAM implementation.
In summary, the EU’s Carbon Border Adjustment Mechanism is poised to drive global decarbonization efforts and reshape trade dynamics, impacting various sectors and raising costs for EU consumers. Producers and governments are urged to strategize to mitigate higher carbon costs and leverage new opportunities emerging from this policy shift.