In the coming months, the European Union will take the first steps towards the introduction of an unprecedented carbon adjustment mechanism at the border (or Cbam, for its acronym in English). The system will tax goods based on the greenhouse gases emitted during production, which could become an impediment for certain Brazilian exports.
Initially, only some products will be subject to the measure, such as aluminum, cement, fertilizers, electricity, iron and steel. The idea is that, to get to the EU, they have to pay the same price that the bloc’s producers already pay for carbon.
Although Brazil is not a major negotiator of these items with Europe, the forecast is that exports will be impacted, especially in the steel sector.
A study carried out by Unctad (United Nations Agency for Trade and Development) showed that Brazil is the eighth country with the greatest exposure to Cbam, considering the added value of its remittances to the European bloc.
The most vulnerable product is Brazilian steel, which can be subject to a carbon tax of US$3.3 per ton, according to the agency’s calculations. Taking into account that Brazil exported more than 600 thousand tons to the European Union in 2021, the blow would not be negligible.
The second most exposed Brazilian item is aluminum. In this case, the impact estimated by Unctad is US$ 4.4 per ton, and in the past, Brazil sent around 43,000 tons of the product to the bloc.
Gustavo Pinheiro, coordinator of the low carbon economy area at the ICS (Instituto Clima e Sociedade), explains that the objective of Cbam is not to create a surcharge, but rather to balance the competitiveness between imported and domestic goods, which are already subject to a carbon tax in Europe.
“If the EU doesn’t do this, Chinese steel — which is made with coal-fired thermal energy and has a much larger greenhouse gas footprint — will arrive cheaper and steal the market from the European producer,” he says. “Cbam protects domestic producers from unfair competition.”
Pinheiro recalls that the system is part of the European Union’s plan to reduce its emissions by 55% by 2030. The mechanism would be a way of not compromising this climate objective with a “carbon leak”, which is when a company reallocates its production to less ambitious countries in environmental terms.
Despite being popularly called a tax, Cbam is not intended to be exactly a taxation, but a system in which the importer must buy certificates for each ton of CO2 embedded in the imported product.
Currently, the proposal is in the legislative scope of the European Union, with some details still being discussed. The report is due to be voted on in May.
According to the European Commission’s schedule, a simplified version of Cbam will come into force in 2023. In this first phase, importers will report emissions from products purchased, but without charges. Taxes begin to be levied from 2026.
When fully operational, Cbam will have the immediate impact of making exports more expensive, but the effects are not limited to that.
Although Europe is not the main destination for Brazilian steel and aluminum, it is a sophisticated market that demands quality products. According to Pinheiro, not disputing it could make Brazil miss the opportunity to manufacture items with greater added value.
“In addition to the short-term impact, there is a very harmful macroeconomic effect of decomplexing the country’s economy,” he says. “The industry is becoming less competitive, it is becoming more primal.”
Cbam is seen as European protectionism
In October 2021, the Minister of the Environment, Joaquim Leite, wrote an article for this sheet criticizing Cbam.
In the text, entitled “border misalignment”, he states that the European Union tries to impose, unilaterally, the creation of an indirect and non-transparent collection mechanism, which can trigger trade disputes induced by the environmental agenda.
The CNI (National Confederation of Industry) also follows the issue with concern. For Constanza Negri, the organization’s foreign trade manager, the fear is related to the disproportionate burden that the mechanism can bring to exports from Brazil and other countries.
In addition to the increase in export prices, she predicts that the Cbam will imply adaptation costs for companies and, in some cases, even make shipments to Europe unfeasible.
“[A questão climática] cannot be an excuse to design a model that will end up creating discrimination between imported and European products”, he says.
According to her, the measure was presented with a merely environmental nature, but the details indicate a more economic interest.
The perception that the European bloc would be using the climate agenda to establish protectionist mechanisms is also pointed out by Cristina Yuan, director of the Steel Institute – an entity that represents the steel sector.
According to her, the climate crisis must be faced, but it is necessary to identify who are the main emitters. Currently, the sector is responsible for 7.9% of total direct emissions generated by fossil fuels, according to the World Steel Association.
“It is no use for the steel industry to make all the effort if the largest emitters do not adopt concrete actions. The global effect will be negligible”, he says.
Yuan recalls that the EU has already set restrictions on steel through safeguards and anti-dumping measures — and the carbon tax will increase those obstacles.
“Cbam could be a major impediment to steel exports to Europe — and that’s what worries us. Europe is an important market and we know that other countries [Reino Unido, EUA e Canadá] are also in the process of establishing such taxation. This can bring about a very big transformation in the flow of international trade.”
Renewable energy matrix can be an advantage for Brazil
The biggest contribution of steel and aluminum to climate change comes from the high energy consumption in the raw material transformation phase. Large furnaces heated to temperatures exceeding 1,000 degrees Celsius generate significant carbon.
For Janaina Donas, executive president of Abal (Brazilian Aluminum Association), the fact that the Brazilian energy matrix is ​​considered cleaner is a competitive advantage that the country needs to exploit.
According to her, Brazilian primary aluminum emits 4.6 times less greenhouse gases than the global average.
“Today, Europe is not our main export destination, but, understanding that the Cbam is a barrier that aims to privilege more sustainable countries and products, it can be an opportunity for Brazil”, he says.
Donas says that the carbon tax does not worry the sector, but it is necessary to understand the details of the regulation – which have not yet been defined.
Cristina Yuan, from Instituto Aço, also believes that Brazil is in a position to satisfactorily meet the Cbam rules in terms of its energy matrix.
In the case of the national steel industry, she still cites the use of charcoal in blast furnaces as a sustainable differential — since the forests that originate the fuel absorb carbon from the atmosphere.
According to Yuan, the steel industry has been looking for new ways to reduce its carbon intensity, either by reusing the gases emitted or increasing the use of scrap as a raw material — which eliminates the step with the biggest climate footprint.
The problem, however, is that the main energy source for the Brazilian steel industry (70%) continues to be coal.
Modernizing blast furnaces to abandon fuel for good is a huge challenge. In many cases, it would be necessary to close factories and build new ones that operate through renewable sources.
A study by consultancy BCG showed that the costs of this transition are high, with the possibility of raising the price of steel by 50%. However, the report says that this is one of the most effective ways to reduce carbon in the sector – and reminds us that the market is already charging dearly for polluting items, such as Cbam.
Carbon market would alleviate Cbam impact
As the objective of Cbam is to equalize the competitiveness between domestic and imported goods, the European Commission says that there will be an exemption for producers who already pay for carbon in their country of origin.
Having a carbon market, therefore, would put Brazil in an advantageous position, but the country has not yet regulated an emissions trading system.
What exists today is a voluntary market, in which companies trade credits on their own, as a way of signaling their ESG (environmental, social and governance) practices to investors and consumers.
In August 2021, a Folha report revealed that the federal government had in hand a study detailing why it is desirable for Brazil to create a carbon market. Even so, the project did not progress and the country ended up losing strategic support from the World Bank to implement the system.
In Congress, the most advanced proposal on the subject is bill 528/2021, by deputy Marcelo Ramos (PSD-AM), which is ready to be voted on in the plenary of the Chamber, in an emergency.
According to Gustavo Pinheiro, from ICS, Cbam will not only boost the green transition in the Brazilian market, as it already is. Proof of this is the behavior of the private sector in relation to the carbon market.
“Before we saw a lot of resistance, and since Cbam was announced, the industry has positioned itself not as a blocker of the agenda, but as a collaborative participant.”
Constanza Negri, from CNI, says that the entity has been working so that Brazil can start an emissions market as soon as possible.
“No doubt, [o mercado de carbono] will make a difference to face a mechanism of this order and put Brazil on another level.”
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