The Carbon Border Adjustment Mechanism (CBAM) could add $275/tonne of cost for some key finished steel exporters to the EU, while the increased domestic production costs could lead to a political backlash, according to Wood Mackenzie.
In 2022, the average import price of steel products covered by CBAM was around $1,450/t. The CBAM fees could increase the cost of delivered steel to the EU by about 56% for India and about 49% for China in 2034, by which point all CBAM costs are planned to have been fully phased in, the consultancy notes.
One initial response for exporters to the EU is likely to be a reorganisation of sales to direct lower-emissions steel to the European market, while higher-emissions production is diverted to markets without carbon fees. The EU plans to monitor and address these strategies, but it does not have a concrete action plan to prevent them, Wood Mackenzie says.
Steel producers with lower production carbon intensities or high domestic carbon price, such as in the US and UK, could be less impacted by CBAM, while Asian producers will need to consider diverting supply.
“In the early stages of CBAM implementation, higher prices in the EU will enable some low-cost foreign producers to maintain exports to Europe. Over time, however, the growing carbon cost will erode the competitive advantage of many non-EU producers, making the EU a less economically attractive export destination for higher-emitting steelmakers,” the firm observes in a report sent to Kallanish.
“Collateral damage should be expected, not only in the higher costs that will be inevitably passed on to European end-users, but also in the additional strains on industrial supply chains. The widespread use of steel products across a broad range of technologies in the energy sector, including wind turbines and electric vehicles, puts them at the centre of the transitioning world,” it continues.
“The CBAM is intended to ensure a fair transition in the EU and globally, but an unintended consequence could be to make the transition in Europe more expensive than elsewhere. In a high-price environment, an additional cost could result in political backlash,” it adds.
EU policymakers will need to monitor the effects of CBAM on energy, food, steel and other commodity prices, and intervene with subsidies to mitigate the impacts on businesses and consumers, Wood Mackenzie concludes.
Adam Smith Poland