"Carbon tax" of the European Union. New European regulation on greenhouse gases.
In the Russian business press, the number of references to the so-called "carbon tax", which the European Union is about to introduce, has become more frequent. Most commentators speak negatively and with apprehension of this innovation. It is possible to understand the representatives of the Russian industry: it is obvious that the export-oriented sectors of the Russian economy, having a base in the form of large industrial giants built in Soviet times without regard to environmental standards, naturally expect a deterioration in their position on the EU market in the event of restrictions on the "import" of carbon. However, despite the alarmism of commentators, in fact, we could not find a less clear description of the mechanism of the EU carbon tax, in this connection, we at the First Validation and Verification Center decided to independently analyze the draft EU Directive from July 2021 and give our vision of the future system transboundary regulation in terms of emissions and removal of greenhouse gases.
First of all, it should be noted that there is no “carbon tax” for goods coming from outside the EU. For some reason, the press has adopted the name of this mechanism, which is not much like ordinary taxes, but hereinafter we will still use this term "carbon tax" since most people are accustomed to it.
It's no secret that the European Union was one of the first to introduce specific measures to reduce greenhouse gas emissions. The first sectors of the EU that received regulation in the field of greenhouse gas emissions were maritime and aviation transport, but later all this developed into a more harmonious system thanks to EU Directive 2003/87/EU of 13.10.20031. This Directive introduced a greenhouse gas “trading” scheme within the EU and created essentially a new business. This business is based on the following: all producers have certain quotas for CO2-equivalent emissions. Whether intentionally or simply in order to reduce actual greenhouse gas emissions, quotas are set in such a way that a number of industries will always exceed the permissible level of emissions. At the same time, there are companies that, thanks to their activities, are actually engaged in the removal of greenhouse gases. Such actions can be, for example, planting forests, pumping carbon dioxide into storage facilities (including underground storage facilities formed after the extraction of natural resources) and other methods. The latter have additional allowances that they can sell to those who do not have enough of these quotas. In fact, this Directive has created a market for CO2 emissions trading within the EU. In the Western press, this system has an abbreviated name - EU ETS from the European Union Emissions Trading System.
Thus, for almost 20 years, the European Union has been creating certain barriers for its own industry due to the reduction of quotas on greenhouse gas emissions, and now, in 2021, a logical decision was made that, in the opinion of European industrialists, their position is unfair, since in fact they will lose in competition with manufacturers from other countries where there is no such system.
The essence of the proposal for a carbon tax is rooted precisely in the EU ETS system, since it is based on a key principle - to equalize the rights and obligations of both producers and importers.
In July 2021, the final draft of the Regulation of the European Parliament and the European Commission "On the introduction of a cross-border adjustment mechanism" (in English - Establishing a carbon border adjustment mechanism or abbreviated - CBAM) was published. The draft Resolution states the following:
- 1. The importer is obliged to annually submit a declaration on how many reportable goods he has imported during the year, as well as submit verified reporting on greenhouse gas emissions for these goods to the authority established by a particular EU member state. If the importer has not submitted to the authorized body the relevant verified reports on greenhouse gas emissions of imported goods, then the authorized body calculates CO2 emissions from these products on its own based on data from similar manufacturing plants in the EU.
- 2. Simultaneously with the direction of verified reporting on greenhouse gas emissions, the importer also sends to the authorized body information about what costs for the removal of greenhouse gases were made by the manufacturer of products in a third country. The notified body compares these costs with what a similar manufacturer in an EU country would spend and, if the amount spent by a manufacturer in a third country is less than that paid by a competitor from the EU, then the importer is obliged to “buy” exactly that amount quotas that would be spent by the plant from the EU.
Thus, the cost of paying the carbon tax is borne by the importer, however, in fact, we understand that a supplier from a third country will have to either prove its level of CO2 emissions and its removal, or significantly reduce the cost of its products to ensure competitive prices.
Application 1 to the Resolution specifies the accountable goods: cement, electricity, fertilizers, iron and steel, and aluminum. Moreover, according to Art. 27 of the Resolution, it is obvious that each EU member state has the right to introduce additional restrictions and include other goods in this list if it finds that, under the guise of an unaccountable product, they are actually importing cement or metal from the list of products in Application 12 into the country.
Thus, we see that the process of creating a leveling mechanism for transboundary carbon regulation is at the final stage. In our opinion, it makes no sense to raise alarmist sentiments in relation to our industry, but it is worthwhile to calmly and thoughtfully approach the issue of preparing for the introduction of a carbon tax on Russian producers.
In fact, there is only one way for Russian producers of accountable goods - to draw up a plan for working with a carbon tax in advance. We see it as follows:
- 1. Conduct an inventory of greenhouse gas emissions and removals. Many Russian companies, in fact, often do not produce as much CO2 emissions as they think. In our experience, most companies tend to mentally overestimate their emissions before knowing the exact value. Therefore, first of all, it is worth simply either independently, based on GOST R ISO 14064-1, or with the involvement of third-party consultants, to assess the level of greenhouse gas emissions and draw up reports in accordance with European requirements.
- 2. Verify your reporting of greenhouse gas emissions. If you literally read Art. 18 of the Regulation, then only verification bodies accredited in any of the EU countries are entitled to actually verify the reporting on emissions and removal of greenhouse gases for the needs of the Regulation. Perhaps in the future, agreements will be concluded on the mutual recognition of results, etc., however, in order to reduce their own risks, the most correct option is to receive a verification report from the European GHG verification body.
- 3. An experienced greenhouse gas consultant will be able to see the directions that will either reduce or remove emissions from the emission reporting stage. To date, Russia is already starting the process of developing technologies for removing greenhouse gases, which are recognized by the EU authorities. In this regard, one should not think that there will be no point in verifying the statements, since in any case we do not yet have a system for removing greenhouse gases. This is not true. Russia already has projects to remove greenhouse gases that will allow producers of accountable products to lower their costs.
Summing up, we would like to note that one can treat the imposed restrictions in different ways, but at the moment the Russian industry is unable to influence them. In this regard, the only choice is a timely response to changes in European regulation. If you still have questions about the carbon tax working methods and the GHG verification and removal process, we will be happy to answer them: CONTACTS.
1 Full text of the Directive on the official website of the EU legal information https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32003L0087
2 The full text of the draft Regulation on the official website of the EU legal information https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A52021PC0564