Effects of carbon border adjustment mechanism: Carbon price scenarios and energy analysis for cement industry

Abstract

The European Commission has announced that they will adopt a new perspective which is called the "European Green Deal" all in its strategies and will make it in the scope of climate change and mitigation. As part of the European Green Deal, the "Fit For 55" package which represents a 55% emission reduction in 2030 has been announced thereafter. This package includes several actions, and one of the important actions is the "Carbon Border Adjustment Mechanism" (CBAM) because it affects the countries that export to Europe. The main purpose of the Carbon Border Adjustment Mechanism is to struggle with "carbon leakage" into European Countries. Initially, this mechanism will cover only carbon-intensive sectors which are iron and steel, cement, aluminum, fertilizer and electricity. Besides, it will cover only direct emissions that occur within production boundaries. However, the scope of sector and indirect emissions are under negotiations and may be included in the regulation after the negotiations. On the other hand, there are some views on the inclusion of all sectors in the EU ETS by 2030. Carbon Border Adjustment Mechanism will be implemented and taken into force gradually to allow businesses adaptation. In the draft CBAM proposal, during the transitional phase (2023-2026), embedded emissions in imported products will be reported periodically and certificate fees will be excluded. Besides, EU Commission will evaluate the functioning of the mechanism and collect information such as actual emissions. As a preview of the mechanism, the transitional period may help to observe the deficiencies and requirements of the mechanism. EU commission will also consider expanding the scope of sectors, products and emissions scope. After the transitional phase (2026 onwards), full mechanism will come into force, and importers will have to pay for certificates that represent total embedded emissions in imported goods in the reporting year. It has to be noted that the CBAM mechanism is still under negotiations, and the current rules of the mechanism may change after the final decision of the European Council. Türkiye has a great export volume in CBAM sectors, especially in iron and steel, cement and aluminium sectors. Besides, Türkiye is one of the leading countries exporting to Europe from sectors specified in CBAM. Especially for cement industry, Türkiye is the largest exporter to the European Countries. Therefore, Turkish cement producers will be indirectly affected by CBAM regulation. First of all, manufacturers will have to monitor, report and verify (MRV) their embedded emissions, otherwise default values which will be more than the average emissions of European producers will be considered. Although certificates will be purchased by the declarant (importer) located in Europe, Turkish producers will be indirectly affected by CBAM regulations, especially in terms of competition. The sectors covered by CBAM have great importance in the Turkish economy. In this context, it is very important to eliminate the negative effects of CBAM regulation by establishing a national Emission Trading System (ETS). In this study, the potential effects of CBAM regulation on the cement producer who is the significant exporter in the cement industry have been analyzed. First of all, since the purpose of this study is to investigate potential carbon prices in the future, I design a future trend of two different types of export products with the historical export data of the cement manufacturer. Besides, I calculate the embedded emissions of the cement manufacturer with its real emission data. With these probable amounts of exports and embedded emissions, I thus calculate the carbon costs and derive these prices in different cases in the near future. These scenarios show the different levels of carbon prices for importers. For the future's estimated carbon prices, two different types of NGFS scenarios were used and these are Net Zero emissions (NZE) 2050 and Divergent Net Zero emissions (DNZ) 2050 scenarios. Carbon prices in the DNZ scenario are relatively higher due to ambitious actions such as phasing out of fossil fuels. Therefore, it generates higher carbon costs for importers. On the other hand, some scenarios such as baselines, phasing out of free allowances in the EU ETS and taking net zero actions by the cement manufacturer are derived from the carbon price scenarios. In addition to these scenarios, the case where indirect emissions are included is stimulated. The results show that carbon prices will likely be quite high and be a heavy cost for the importers. If an emission trading system is established in Türkiye, these prices will be a cost burden for the cement manufacturer. Accordingly, cement manufacturers will likely be affected negatively by both cases. Since the emissions are directly related to the energy used, the current energy situation is assessed and alternative energy sources are analyzed in line with the research. This study provides a comprehensive sectoral carbon price analysis and a roadmap in line with the results and evaluations.