Internal carbon pricing can shield businesses from CBAM ‘ripple effect’
The EU’s Carbon Border Adjustment Mechanism is triggering creative thinking around pricing emissions
Adopting an internal carbon price that puts a monetary value on a company’s carbon emissions can help businesses manage climate transition risks, according to a report by US-based business membership club The Conference Board.
The EU’s Carbon Border Adjustment Mechanism, which came into force in 2023, imposes a carbon tariff on imported, carbon-heavy products. The mechanism aims to ensure that imports from countries without carbon pricing do not undermine products made in the EU, where producers pay for their emissions under the union’s emissions trading system.
The CBAM is forecast to generate an additional €1.5bn in annual revenues from 2028, creating 1-2 per cent of global carbon tax income.
Other CBAMs are expected to be launched around the world, including in the UK, which plans to introduce its mechanism in 2027. “We anticipate that EU trading partners will raise their carbon prices to prevent revenues from flowing to the EU and instead benefit their own economies,” the report says.
The EU CBAM has faced opposition from countries including the US, China and India, and could face legal challenges at the World Trade Organization on the grounds that it could violate the WTO’s principle of “non-discrimination”, which demands that all trading partners are treated equally.
Similar proposals
Some opponents to the CBAM, including India, are nevertheless examining similar proposals. Talks about India contemplating its own domestic CBAM and a domestic carbon tax have been reported in the local press.
“Having been vociferous in their opposition to the EU policy prior to the start of implementation, India’s decision to look anew at a domestic carbon tax is reflective of the wider dilemma that the CBAM is posing for governments around the world,” says Anuj Saush, environmental, social and governance centre leader at The Conference Board Europe. “The Indian government may still press ahead with a challenge in the WTO, but they are clearly keeping their options open.”
The Conference Board noted a wide spread in carbon prices across different countries — in 2023, carbon was priced at $1 a ton in Kazakhstan and at $155 a ton in Uruguay. However, it predicts a convergence in prices as more countries adopt emissions trading or carbon tax initiatives, prompting a move towards the EU’s expected ETS benchmark of around €100 a ton of emitted carbon dioxide.
“While carbon’s price trajectory remains unpredictable, €100 a tonne of CO2 by 2026 is increasingly probable,” says Saush.
In the meantime, companies can get ahead of the “ripple effect” on global carbon markets caused by the introduction of the EU CBAM by adopting their own internal carbon pricing, The Conference Board says.
ICP is on the rise
Companies could face financial and administrative hurdles if and when authorities introduce carbon pricing policies, including costs related to data collection, monitoring and reporting, the organisation cautions. It suggests that one answer could be for companies to introduce their own pricing policy. In 2022, the number of companies using ICP rose by 12 per cent to 1,203 companies, The Conference Board states.
The report sets out a number of different approaches to ICP, including the idea of a “carbon shadow price”, which attaches a theoretical cost to each ton of CO2 emitted. Companies can use these figures to assess the likely environmental toll of projects. Shadow pricing is the most popular form of ICP, accounting for 68 per cent of ICP strategies, it says.
Another option being introduced by some companies is an internal carbon fee, whereby each part of a business is billed on its carbon emissions, says the report. The theory is that the company reinvests the proceeds in actions that will help it reduce its emissions and meet its sustainability objectives. Different units within the same company could, under such a system, trade emissions allowances.
“Ultimately, the more policies and market tools incentivising countries and companies to set carbon prices, the faster they will reduce these costs and tackle climate change simultaneously,” commented Tommy Ricketts, CEO and co-founder at BeZero Carbon, a carbon ratings agency.