Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
International Emission Policy
Europe is taking policy action as it works to achieve its climate change commitments for carbon neutrality by 2050. The new Green Deal is stepping up Europe’s 2030 climate ambitions by pushing Europe’s transformation into a more equitable and climate-resilient society with a resource-efficient, sustainable economy. The Green Deal recognises the Carbon Border Adjustment Mechanism (CBAM) as a main tool to reach the EU’s legally binding Paris agreement commitments. Recognised as a key topic in COP26, the CBAM sets out requirements that have the ability to impact trading systems, manufacturers, construction projects and real estate assets across the world.
Carbon Border Adjustment Mechanism (CBAM)
The CBAM system is a policy that aims to minimise the risk of carbon leakage by imposing a carbon tax on imported products for selected industry sectors. Carbon leakage describes the potential trading advantage earned from relocating production from an economic area imposing more rigorous emission policies, to one where less stringent emissions policies are in place.
Under the CBAM measures, EU importers must buy carbon certificates that accurately reflect their product’s carbon content according to the carbon price that would have been paid, had the goods been produced within the EU’s carbon pricing rules. The carbon price reflects the EU Emission Trading System (ETS) prices corrected by any free allowances the EU producers are entitled to, whilst still maintaining compliance with World Trade Organization (WTO) rules.
The existing ETS system succeeds in setting a cap on the amount of greenhouse gas emissions that can be released from industrial installations, and in providing a certain number of free allowances according to emission efficiency benchmarks and the sectoral risk of carbon leakage. However, the ETS system has failed to incentify and reward greener production methods and investments, prompting the EU Commission to propose the alternative CBAM system.
Timeframes and scope
The CBAM system will be gradually introduced in 2026, giving time for a three-year data collection and transition period, eventually phasing out the existing ETS free allowances by 2035. Through this transition period, EU importers will have to report on the embedded carbon emissions from their goods. The total CO2 emissions for each product will then determine the number of certificates they need to purchase by the end of the period.
The CBAM system will initially apply only to a selected number of goods that have been identified with a high risk of carbon leakages such as:
- Electricity generation
However, the current proposal leaves open the possibility to expand the CBAM scope and the “system’s boundaries” to cover more complex goods in the future.
A more extended scope could mitigate a possible competitive advantage of complex products produced in third-party countries. However, regardless of the scope chosen, the EU should increase engagement with the Member States and non-EU third-party countries most at risk to this competitive advantage determine a fair solution.
A recent survey conducted by the World Bank shows that Russia is the largest provider of CBAM products to the EU, followed by Turkey, the UK, and China. Whether CBAM will result in increased costs for EU exporters and importers will depend on several factors, including:
- The bloc’s export/import reliance
- Emission levels intensity
- Trading partners
- The relative trading power of the importer
- Existing carbon prices
The impact of CBAM in the UK
According to the OECD effective Carbon Rate Score and its reference carbon price, only the UK, China, and South Korea currently have an EU equivalent ETS system in place. As such those countries are likely to initially be exempt from CBAM and will experience some cost and allowances reductions. Yet there are countries that face the risk of higher import costs on CBAM products coming from non-EU regions.
Despite the UK having an equivalent ETS system in place, the UK is still one of the countries more exposed to the EU’s CBAM. As such, as the EU’s future transition to CBAM and the associated pricing changes still have the potential to impact the UK and should be considered. Particularly in terms of its exports of iron, steel, and aluminium. It is therefore in the UK’s interest to be fully exempt and to align its own ETS to the EU’s.
The UK Government and the Environmental Audit Committee has launched an inquiry into the role CBAM can play in addressing potential carbon leakage and meeting the UK’s environmental objectives. This call for evidence is seeking to understand any potential impacts, risks, and opportunities that a unilateral CBAM might present, particularly the potential burden on smaller UK businesses.
CBAM in the Construction Industry
Over the past five years (2016-2020) there has been an overall increase of 160% of EU imports of cement from non-EU countries. This highlights the significance of carbon leakage in clinker production in non-ETS enforcing/applying countries. The CBAM is vital to ensure that EU and non-EU suppliers compete in real terms by virtue of a true carbon price. Without this level playing field, EU industries are certain to fail, posing the risk of factory closures with the untold consequences of social and labour implications, not to mention the increase in CO2 emissions from the less regulated cement industry.
The response from energy-intensive industries, such as cement and building material producers, will play a key role in the CO2 emission reduction measures and the overall CBAM adoption. The European Federation of Building and Woodworkers (EFBWW) and European Cement Association expressed both their support and raised their concerns in their last position papers.
EFBWW mentions 8 points of consideration:
- Scope expansion
- Indirect emissions
- Decarbonisation support
- Free allowances
- Verified emissions
- Exporting to third countries
- Ensuring a level playing field
- Resource shuffling
Despite the concern of European Federations, a recent economic impact analysis carried out by the University of Cambridge using Cambridge Econometrics’ E3ME model, shows that the introduction of an EU CBAM could lead to a small increase in EU gross domestic product (GDP), of 0.2% by 2030 and 0.4% by 2050 and potentially the creation of 600,000 additional jobs across the EU. The sectors that would benefit the most from an EU CBAM include those that currently receive ETS free allowances, such as the energy sector.
According to the model’s findings, the mechanism would result in an additional minor CO2 reduction (0.023%) outside of the EU which may be read as less carbon leakage. The modelling also demonstrates how an EU CBAM could be useful in enabling more ambitious domestic climate policies and work to enhance political acceptance of high carbon prices.
The European Commission will have to negotiate with the Member States as well as with international trading partners on its emission reduction measures in order to achieve a harmonious outcome. The legal and diplomatic arguments around CBAM from many of the industry associations will add further tension to Europe’s key trading relationships and is likely be a time-consuming process.
The outcome changes in prices and carbon allowances are likely to impact the construction industry to varying degrees around the world, depending on the different ETS systems in place. These impacts would also be felt across the real estate sector as asset owners, investors and operators develop new assets and refurbish existing building stock. However, further research is required to predict the exact impact the implementation of CBAM will have on the real estate industry.
Ultimately, emission reduction measures and the fight against climate change are sitting high on the EU’s wider political agenda. Going forward the EU’s strategy will be to persuade countries to introduce comparable carbon mechanisms and continue petitioning the international community towards climate change action. However, if partners are unwilling to efficiently cooperate, the EU will likely still move forward with CBAM, albeit with caution to prevent a domestic backlash.
There are numerous options available to the construction and real estate sectors to measure and report on their emissions, such as:
- Life cycle assessment (LCA)- measures the environmental life cycle impact of construction products and material including carbon and we have comprehensive Environmental Products Declarations (EPDs) verification scheme
- Building Information Modelling (BIM)- BIM models can include information on embodied carbon content
- Responsible sourcing frameworks – such as BES6001
- Sustainability certification schemes such as BREEAM – third-party assessment and verification of built environment sustainability, including impacts of construction products and materials.v
This article was written by Christina Georgiadou, Principal Consultant, BREEAM
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