A dose of realism for Europe’s CBAM

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Eklavya Gupte:

Hello and welcome to Energy Evolution, the S&P Global Commodity Insights Podcast dedicated to covering the fascinating and ever-changing world of the energy transition.

I am your host Eklavya Gupte, and in this episode, we will try our best to dissect the proposed changes to the EU's Carbon Border Adjustment Mechanism or CBAM. We will examine and explore what the tweaked version of CBAM means for global trade.

Firstly, for those who don't know much about CBAM, this mechanism essentially imposes a carbon tariff on emission-intensive commodities imported by the EU, including aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel. And the aim is to level the playing field for EU industry by reducing carbon leakage as most exporting countries do not have a carbon price, especially a price as high as the one in the EU emissions trading system. This carbon border tax is currently in its transitional phase where importers must report emissions embedded in relevant products, but there is no financial penalty.

However, CBAM will enter its definitive phase on January 1st, 2026, with bigger implications for many industries. But as we know, the European industry is mired in an affordability and competitiveness crisis, with several EU member states increasingly focused on industrial survival rather than decarbonization. And Brussels has had to pivot and make some changes. The commission has proposed to tweak the timeline for the sale of carbon pricing certificates under CBAM, and move to a mass-based threshold to make this more streamlined and effective. Brussels say these changes eliminate CBAM obligations for almost 90% of total importers, while still covering almost 99% of emissions in scope.

So we have several guests today to delve into the nitty-gritty of these proposed changes. To start off, we spoke with Coralie Laurencin, Senior Director in the Power and Climate Policy Team at S&P Global Commodity Insights. Welcome Coralie to Energy Evolution. Thank you so much for joining us.

So to start off, Coralie, can you please give us some insight into what were some of the big changes, the big reasons behind the changes to CBAM, and do you think they can actually make a big difference?

Coralie Laurencin:

Yeah, so thanks, Eklavya. I'm delighted to be here. And it's a really topical topic, right? There's a lot of discussion around CBAM. It's an important topic for Europe at the moment.

So what happened recently was that the European Commission set out some proposals to simplify CBAM, really simplify as much as possible. And it's important to keep in mind, that these are proposals, so this needs to be validated by the Council, European Parliament. My view is that it'll be quite simple. We shouldn't expect hardly any pushback. So I would expect most of this to go through as it is.

The idea here for the commission is that it's heard what stakeholders have been saying, which is that, "This is a really complex instrument. This is a really cumbersome instrument. This requires a lot of effort and manpower to comply with. And so what can the EU do?" And the EU has replied and it's said, "Well, we can simplify and we can do it with several measures. We can make sure that there are fewer importers that need to comply with CBAM. We can change how default values are calculated so that it's more fair, more respectful of what people actually are emitting. We can give a little bit of leeway about how many certificates you need to have every quarter," so a little bit of breathing space. And then the main measure was that there's a delay for the first year only in the handing in of the certificates. So you don't need to hand in certificates until end of 2027 for emissions in 2026.

So all of that just gives a little bit of breathing room to the importers. But more importantly, what it's done, specifically with the change of the threshold, is that it has said, "Well, a huge amount of people who were in CBAM are now no longer in CBAM." So there are much fewer importers that are going to have to deal with this process. So that's the main thing.

Eklavya Gupte:

Thank you. And generally, what has been the response from the industry?

Coralie Laurencin:

The response has been really positive. Industry is welcoming these changes. What they're also saying is that there's more that they'd like to see from the EU. So industry thinks this is a first step, but of course, industry, very pleased with the proposal.

Eklavya Gupte:

And you mentioned some of those changes, and we've heard that they want to add a scope of downstream products. There's various others. So can you give us some insight into some of the changes that we might see? And what do you really expect? What more changes do we expect on CBAM?

Coralie Laurencin:

So this is really the interesting bit. We think that the CBAM is unfinished business. It's a first-of-a-kind policy. It's very novel. No one has done this before. So it really is learning by doing for the EU and, unfortunately, for stakeholders in this. We expect to see more changes in the coming year.

What I find personally striking is that the EU is now considering measures that were completely inconceivable two, three years ago, when this was first accepted and discussed. And you were saying export rebates, for example, the inclusion of downstream products. So all of what industry has been saying are loopholes in the system. The fact that if you pay a carbon cost in Europe, but you export your product to a geography where there is no carbon cost, then you're at a disadvantage. So that's what export rebates are meant to solve.

And then there's the whole issue of downstream products, which is, "Well, that's fine if I import steel, then there is a carbon cost that needs to be associated, but what if I import a product that is made with steel but not in the list of CBAM products?" So all of these discussions are now happening. The EU, you can tell, is listening, is trying to figure out if it can do it and if it makes sense. Because it needs to make sense. There needs to be enough of a cost differential for it to introduce this measure to wider products.

Eklavya Gupte:

Thank you. And you mentioned some of these changes, and it does also sound like the commission is almost becoming a bit more protectionist, or CBAM itself is becoming a bit more of a protectionist policy. Would you say that's the case, and especially, in the wider context of all these tariffs we're seeing, and some of the geopolitical tensions, especially to do with trade?

Coralie Laurencin:

So first of all, I fully agree. That's absolutely the point The European Union is trying to make CBAM easier to deal with, but it is not weakening CBAM. And I think, exactly as you've said, quite the reverse, trying to make CBAM more airtight, more solid, more protective of EU industry. And it's exactly what you were saying. It's a difficult time for Europe. There are global tensions, global political tensions. There are trade tensions, there's a war in Europe, war in the Middle East. There's overall less appetite for a collaborative global effort to solve climate change. And Europe is finding that it's set the bar very high for itself, and the rest of the world is thinking about other things.

So it's having to think about where does it go from here? And especially because growth in Europe is weak, European industry is not doing well. And as you were saying, it's coming under a lot of competition from countries which may have access to cheaper energy, or where the investment frameworks are more supportive. And of course, Europe feels, and industry feels, we need to be in a strong place to deliver this energy transition. This is not where Europe is. So if it is going to go forward with aggressive carbon pricing and remain the premium carbon market for the world, then it needs to be very mindful of how that impacts industry.

Eklavya Gupte:

Okay. No, thank you. Very interesting. So is it fair to say we expect more tweaks of EU industrial and climate policy, or is it more of an intersection between those two?

Coralie Laurencin:

I think that's the big question. We are starting to see signs, more or less subtle, that Europe may have to rethink some of what it's already agreed and take a hard look at where it wants to go. And let me detail that a little bit. If you look at what member states have been saying, what industry is saying, there are some questions on the usefulness or the validity or the appropriateness of certain of the Fit for 55 package of measures.

So there are discussions about, "Can the car industry meet the emissions target that it has?" There are questions about, "Have the rules for the definition of renewable hydrogen been set appropriately? How do we get to low carbon heat?" Because really banning boilers, which the EU, several EU countries have tried to do, has not been successful. So there are little bits of tension in various pieces of regulation. And we think that the EU is going to take a hard look at that, or we think that member states will push the EU to take a hard look at that.

And the big question is, what does that mean for the carbon market? Because the CBAM is the flip side or the other side of the coin of the carbon market. Where is that going to go for Europe?

Eklavya Gupte:

Yeah. And that segues well into my next question, which is what does this simplification mean for the EU emissions trading system as CBAM was linked with the phasing out of free allowances? And yeah, just be interested to find your thoughts on that, and also maybe an outlook on EU carbon prices.

Coralie Laurencin:

Yeah, so carbon prices in Europe, since the start of the war in Ukraine, have stopped their purely upside trajectory. So prices are much more range-bound, and the range is quite large, somewhere between 60 and 80, depending on where we are. But it's really hard to see now that prices will surge in the way that there was some expectations they would. We still view that prices will rise out to 2030 and beyond. And that's because we have the assumption that the ETS will stay as it is with a declining cap, with more pressure on industry.

So our view is that we see a €100 per ton in 2030, which two or three years ago, you would've said, "Well, that's incredibly conservative." And today you might think, "Ooh, that's actually quite, that's a large price for industry." That's something the industry will struggle to deal with, especially in this hyper-competitive environment. And I think we're at a place in the European discussion where a very small window is opening for a very hard-nosed discussion about the future of the ETS, and how much can European industry take.

Because you could argue that the ETS has done its job for power. Power in Europe is largely decarbonized. We've got 50% renewables, roughly, and 70% low carbon if you include nuclear. And you can see that renewables' addition will continue. You can see that the power is en route for a very well-decarbonized power mix.

So the question is, what we do with industry? And the ETS's trajectory has always been, "Well, we are going to bring industry in the abatement story. We're going to lower the cap. We're going to make industry reduce its emissions," and that's going to push the price up. And that increasing price signal will push industry to reduce its emissions or to make investments to reduce its emissions further.

But now we're in a place where Europe is starting to ask itself, "Can industry carry that cost at a time when it needs to beef itself up, to compete globally?" And there are voices saying, "Should the ETS be softened? Do we need to think about what is the appropriate range of prices, and how do we get there?" And what we're seeing is that these are very early stage discussions, but in the economic context where we are, in the global trade context where we are, it makes a lot of sense. And the team that I am in, we are starting to explore what would a softer ETS scenario look like? How could that play out? What would it deliver? How would it impact industry empower? So that's really interesting. I think we're at a time which is unlike any other in the history of the ETS, really.

Eklavya Gupte:

And I guess one question I wanted to say was, one of the big purposes of CBAM was to level the playing field, but also to incentivize other countries and regions to adopt carbon pricing, adopt their own CBAM. And I know we've seen some of these changes, but is that objective still the case? And what are we seeing globally that might help CBAM or might help carbon pricing?

Coralie Laurencin:

So we're definitely. I think CBAM, in that respect, is a success. It has pushed the adoption of carbon markets globally. There are many countries that are thinking about introducing carbon pricing.

So around the EU, I think Turkey is one of the best examples. It has set a net-zero target for after 2050, but nevertheless, it's got ambition to cut emissions in steel. It's thinking about the design of its ETS, and all of that, is very much ETS-driven.

And then, obviously the UK is a good example as well. It has a carbon market. It's very similar to the EU market, but it's thinking, "Should we be joining the EU, at least from a carbon perspective, and at least rejoining the EU ETS?"

India's thinking about a carbon market and has put objectives to decarbonize steel, and we're seeing investment in Indian steel. We're seeing companies looking at electric arc furnaces and steel looking at CCS.

So definitely it is having an impact. And that is a win for Europe. Because one of the ways that Europe wanted to frame CBAM was to say, "Well, everyone is slowly coming to this idea that carbon pricing is essential, and we're going to introduce the CBAM until everyone has introduced carbon pricing. It'll be a transitional mechanism, but it will push countries along and it will get us all to the place where we need to be in 2050." That kind of thinking, where everyone is aiming for the same place in 2050, no longer seems to be a global priority, but the threat of the flows of money definitely have focused the mind and we are seeing carbon instruments being rolled out much more, thanks to CBAM.

Eklavya Gupte:

Thank you very much for your time, Coralie. Really appreciate you coming to speak with us on the podcast.

And now we move to the second segment. And here we're lucky to be joined by two experts who I would say have been living and breathing CBAM these last few years, and have been very much involved in the real details around this highly complex, high stakes world of carbon taxes and emissions accounting.

We have Dan Maleski from Redshaw Advisors, who's leading the Consultancy's EU CBAM research team and has been working with industrials, governments, and various other stakeholders on this issue.

And we're also lucky to have Nick Ogilvie, Product Manager at CarbonChain, which specializes in the complicated world of carbon accounting, and has tailor-made solutions targeting the commodity markets.

Firstly, welcome both. Pleasure to have you here, and thank you for joining us in our London studio.

Dan Maleski:

Thank you very much.

Nick Ogilvie:

Thank you very much.

Eklavya Gupte:

So to start off, obviously the commission has made quite a few changes to reduce the impact of CBAM on small importers, but there are still a lot of uncertainties with regards to CBAM. So to start off, can you highlight some of these uncertainties? And how are the importers of these goods and the various stakeholders handling these uncertainties?

Nick Ogilvie:

Yeah, sure. Happy to start.

So I think the sigh of relief from many of the impacted businesses on CBAM has been around the focus on simplification. The key change has been the threshold increase to 50 tonnes, which is tonnes of material, or a 100 tonnes of CO₂, being imported on an annual basis per entity.

Now, as you mentioned, this reduces the number of entities in the EU, who now have to continue to do their CBAM reporting quite significantly, removing around an estimated 180,000 entities in the EU from that obligation. This will align with the Omnibus changes, the objectives behind Omnibus around simplification of or reduction of the administrative burden for these EU entities.

But as you mentioned, there are still some key uncertainties that remain in place, particularly as we move towards the definitive period where really the key focus is on how much is this all going to cost us. And so whilst the reporting burden is reduced, there still remain a number of pieces that are unknown with regards to the CBAM cost.

Dan, I don't know if you want to talk a bit about a few of those.

Dan Maleski:

Yeah, yeah. Well, firstly very well said, Nick. And just to point out, the CBAM has always been intended to change as it evolves. I like to say that the CBAM is almost building the plane in flight, and it has to be designed that way.

If we take a step back, a policy like this has never been really introduced. There isn't truly a precedent. There has been some theoretical ideas. I mean, if I look at what California potentially looked at, when they incorporate BCA for their power sector, but no one's ever done this. So it's very much understandable that the EU is having an approach of trying to have training wheels for itself as well as industry.

But the result of that, of course, is a lack of certainty. And that is one of the main Achilles' heels of this policy. If I look at some of the main changes that will likely take place to the CBAM in not even the coming years, but the coming months, looking at things such as export, leakage protection measures, potentially expanding CBAM both to downstream emissions and to new sectors, and a plethora of more changes. And so as much as these changes can be very difficult to navigate, they are required, if we want to ensure that this policy stays robust and accomplishes the goals that stood out to be, which is to mitigate carbon leakage.

Nick Ogilvie:

I think one of the big takeaways that people may be interpreting incorrectly is that CBAM has the costs been delayed, which is not correct. So whilst the payment structure on the Omnibus has been shifted where certificates now purchased in 2027, the fundamental implementation of a CBAM cost on CBAM goods being imported into the EU still takes place from the 1st of January 2026.

So if you are an entity who is importing these goods and you intend to release them for free circulation and you expect to import above 50 tonnes in the year, you need to be accruing for your CBAM costs. And something that, I think, we're going to get into a lot more detail is what are you accruing for? So what is the actual CBAM certificate cost that you are exposed to from the 1st of January 2026?

Eklavya Gupte:

And you said now you only have to purchase CBAM certificates from February 2027, so there's a bit of breathing room. But how are companies having to change their strategy or have they had to change their hedging strategy or not? And what's the main reason for that 13-month grace period, so to speak?

Dan Maleski:

So my clients have not changed their hedging strategies at all.

Let's take an example of, let's say I'm a steel trader. Let's say I want to sell my steel and import steel from, let's say February 2026. So if I'm looking at how steel typically is traded, that means that contract could be signed, in let's say, August, or even July of 2025. So we're talking only a few months. So we're talking maybe four or five, six months until custom clearance. But nevertheless, they will still incur a cost of carbon. It might not be realized until 2027, but it's still being incurred.

So actually the issue is that some folks can perceive this as breathing room, even though realistically, if you look at the financial incursion, nothing changes. Therefore, the folks that we work with at least, we have to really ensure that they're aware that actually nothing really changes when it comes to the financial incursion, it's simply one that cost is realized i.e. cash flow. And so that's one of the issues we're having, is actually, a perception of what's going on.

Nick Ogilvie:

And there's sort of two variables in CBAM cost. There is the EUA price, which will dictate the CBAM certificate price, and that'll be on a quarterly average basis in 2026. And so as Dan says, you can establish with the help of good partners, an effective EUA hedging strategy to cover your CBAM certificate costs. But what you don't necessarily know is the other variable, which is on the product emissions intensity. So the way that CBAM certificates are calculated is relative to a CBAM benchmark, another unknown that we expect to hear about in the coming months from the commission, but specifically you have a carbon intensity of the product that you're importing. You compare that to the benchmark figure, which will be an intensity figure.

And then if you're above the benchmark, you have to purchase certificates. If you're below the benchmark, you will not have to purchase any certificates in the same way that there is free allocation under the ETS with regards to the purchase of EUAs. So we're mimicking the ETS system for costing.

So with the emissions intensity figure, one of the other challenges is that today you will not know what that emissions intensity figure will be in 2026. Because the number that you need to use in order to assess your certificate cost is the verified figure based on the calendar year 2026 calculation of that product's emissions intensity, which must be received from the supplier and must be verified in order for it to be used in, if you use that number instead of a default value, in order to calculate your certificate exposure in 2027 for those 2026 imports.

And this brings up a number of challenges for importers, because effectively, there is an unknown cost with regards to exactly what that figure will be. However, we will have a default value that unlike in the transitional period where there is or has been a requirement for actual data since July 2024, we will have default values to be used for this cost calculation in 2026, whether or not you want to use those numbers as a result of the fact that they will be defined to be punitive, in the sense they'll be based either off available data from the country of origin or the 10 worst countries and emissions intensity basis for that specific product.

Eklavya Gupte:

Thank you. And obviously, this creates a lot of uncertainty on costs. So how are traders and manufacturers dealing with this and how are they changing their strategy?

Dan Maleski:

Yeah, it's a very good question. And when it comes to the relationships we've had with traders, the main motif is that they're not a fan of speculation at all. And so, as Nick mentioned, with all these variables, CBAM benchmark, default values verification, it's something that traders are not a fan of.

And so if I'm a trader, if my entire business model is to lock in a margin by hedging all my variable costs when I get that contract, I can't hedge or manage that CBAM costs, well what do I do? They have a few, very limited options, and very expensive options at that. We've worked with some traders to incorporate various option contracts. Because again, one of the main variables that they can look at is EUA price, well maybe they can try and tackle that. So we can incorporate, for example, some type of option contracts, but that incurs a premium.

And again, it potentially can even further erode the profit margins that they still can't even predict because of all this. And so the result of this are traders being very, very frustrated, and I don't blame them. I mentioned earlier that the CBAM is supposed to change, and it's supposed to change to benefit the policy, but if this policy keep changing and there's a lot of unknowns, how are people supposed to navigate this? Especially when you look at the different types of business models, because an industrial, and a manufacturer, and a trader will all interact with this policy different. They'll pass the costs on differently, they can even incorporate different contracts differently.

And so the result of that, in an environment that can continually changes with this policy, is a lot of frustration, and that really is the main emotion that I feel when I'm speaking with my clients who are traders.

Eklavya Gupte:

What are your learnings from some of your sources and clients on this? And are there particular sectors that are coping better with CBAM or are better-placed? So just be good to get a wider perspective on how things are currently working and has the commission listened to some of the feedback?

Dan Maleski:

Yeah, from my perspective, let's take a very simple example of cement. So when you make cement, it's fairly integrated. When you trade cement, isn't typically traded more than a 500 kilometer radius. And so if I'm Europe, I'm typically dealing with the same players, unlike steel or aluminum, which is very much global, and especially if I point out steel and aluminum, cement is typically traded when it comes to fairly upstream products, clinker, for example, but steel, that's almost everything. Of course, you're going to see a lot of trade volumes in more upstream products, but they'll still trade products that can be further downstream.

And so that creates a few challenges. First of all, it creates circumvention, which the commission's very much aware about, but that is still very much a concern for our clients. It also creates a significant more amount of complexity, especially if you actually look at the precursors in how steel can be traded. This is more Nick's neck of the woods, but if I just take my conversations from my cement versus aluminum clients, it really is two kinds of perspectives on this that are quite significantly varied.

Nick Ogilvie:

Yeah, the steel, aluminum complexity is certainly, hindered by the fact that there are many intermediaries and there are different processes that these steel products get to market. I think one of the areas that will continue to be an ongoing challenge is where you have distributors, stockholders of these materials, where actually in the same lot, they are combining material from many different mills under the same, from different production processes, which have different emissions benchmarks, different emissions intensities. And so the ability for those players to accurately track and then be able to accurately price the CBAM cost is something that will make a significant commercial difference to the viability of the number of these businesses.

So yeah, steel and aluminum certainly continues to be tricky, hopefully, with some of the Omnibus changes. And when we get an understanding of what the modifications look like around downstream processing, the requirements for verification of simply just allocating precursors to finished good submissions, that will hopefully give more transparency to cost fundamentally, but also to the operational requirements for these businesses to continue to operate on the thin margins that they do.

Dan Maleski:

And that's one thing that did surprise me is, and you said it right there, a lot of our clients do operate in fairly thin margins. And so when you incorporate uncertainty, when you incorporate new risks, when you're already looking at a fairly competitive landscape, it creates a lot of headaches, a lot of issues, a lot of questions of, "Is this market still worth it?"

Now if you really analyze, this is something that could significantly disrupt trade. If I'm looking at export destination markets and I'm looking at, let's say, going to the EU, and there is a significant amount of barriers to even enter that market, it creates very inefficient trade patterns. That's one of the main things any economist would say about trade is, you don't want barriers. Barriers create tension. Tension creates inefficiency. And that is something that the EU could risk with all these hoops to jump through to even make it to market. And that's again, another one of the many headaches that a lot of our clients are dealing with. It's not just CBAM, it's EUDR, it's the acronym soup, and it's something that they're very concerned about.

Nick Ogilvie:

Maybe, just quickly on the positive side as well, I think our business has focused on carbon accounting, providing the most accurate emissions' data that we can to facilitate decarbonization decisions. And CBAM in many cases, has been the first time that businesses have ever done carbon accounting. And generally you start with carbon accounting through a spend-based method, or you look to use a global or a country average emissions factor for the material that you're trading or producing. And all of a sudden, CBAM is mandating that you have asset-specific emissions factors at the product level in many cases, which is some of the most granular carbon emissions' data, if not the most granular carbon emissions' data that you can have.

And so we've seen many businesses with their corporate net-zero objectives look at CBAM as this incredible opportunity for them to translate getting better carbon data into an actual, a really valuable commercial incentive and improvement for their business.

So many of the net-zero objectives that businesses had and set in the late-2010s and in some cases, early-2020s, CBAM coming into effect with 2026, is really trying to have actual data so they're aware of what their costs are going to be going into the definitive period, that they've shortened the timelines to getting actual emissions intensity information from their suppliers to facilitate some of those low carbon decisions. So having that carbon price and then not insignificant carbon price, straight off the bat in 2026, is really exciting to see this carbon cost feeding into procurement, lead the decisions, and then product development decisions.

Dan Maleski:

So I moved to Europe from America because I believe in a very simple saying, which is, "Capitalism got us into this mess. We need to leverage capitalism to get us out of this mess." I.e. capitalism, industrial revolution created climate change, but if we leverage capitalism in a market-based approach, the EU ETS and the CBAM in this case, we can get us out of these issues by leveraging the behavior incentives that a cost incurs.

So if I'm looking at the carrot versus stick approach on how I can incentivize behavior when it comes to climate change, let's say the carrot is the IRA, that's the US subsidizing, trying to incentivize decisions that way. But Europe's taken the stick approach, which is a cost of carbon, and it's created some brilliant results. The EU ETS, as a result of the EU ETS, EU ETS exposed industrials and utilities have reduced their emissions by 50% since 2005.

Now that's because they've been forced to do this. Now it's not just paying for emissions, it's also measuring them. And the saying goes, "You can't manage what you can't measure." And so I completely agree with Nick. This is forcing companies to get into that mindset of, "Yeah, this is going to matter. It's not trivial. This is no longer something I can disregard and I can maybe market a bit, but I can't really have action." This is forcing them to take action.

And that's why I think it's brilliant. And that's why I'm a big believer of the CBAM when it comes to its final goal, but it's going to be very painful. Decarbonization will be very difficult for a lot of companies if you look at the bell curve, unless you're an early adopter of these solutions and technologies, unless you're trying to look ahead. Because if you're just twiddling your thumbs and you're not really taking the CBAM seriously or the EU ETS seriously, or these costs of carbon, those are the folks who get hit out of left field in 2026 with some very significant costs.

Eklavya Gupte:

Thank you. No, that's really good to find out some of those positive impacts from this policy. And as you all have mentioned some of the uncertainty, but we live in a world currently where geopolitics is pretty much dominating every market, US tariffs, there's a US tariff announcement every other day, and maybe the world or policies becoming more protectionist. So I guess the question is, how does CBAM fit into this? And we're already seeing more CBAMs propping up, but how do you see this moving forward from a policy perspective?

Dan Maleski:

Well, the landscape we're in is, I'm going to quote Mark Twain, he says, "History doesn't repeat, but it rhymes." If you look at the 1930s, with the Smoot-Hawley Tariff Act, the global geopolitical landscape is somewhat copying that. Very much protectionist, very much isolationist to an extent, and global trade does slow down. It's not just the CBAM, it's again, it's mainly the positioning that a lot of the superpowers are taking, and to an extent, them disregarding the WTO.

So CBAM is not necessarily adding fuel to the fire, but it does fit into the global positioning of a lot of countries, which is to incorporate border adjustments. Now, the CBAM is not a protectionist policy. It's there to mitigate carbon leakage, but is in a realm that's surrounded by countries that have protectionist policies. So the issue of that though is countries are going to start seeing CBAM as a protectionist policy. So it doesn't matter if the EU commission has an agenda to mitigate carbon leakage via the CBAM, really it matters of what's the eye beholder of who's responding to it. Because if I'm in America, and if I look at the CBAM and I say, "That is a protectionist policy, I shall respond as such." Now that is an issue. Because again, it's not how CBAM is designed to be, but it is potentially how it's being interpreted.

Nick Ogilvie:

I guess depending on the way you view the CBAM, the ultimate goal is that really there is no CBAM, in the sense that there's no cost adjustment. And what we'll see is, and as you mentioned, we're already seeing this, there are growing emissions trading systems being developed around the world with key trading partners with the EU, because they're acknowledging the fact that if they don't do that, then those goods going to the EU, their revenue will be collected by the EU through the Carbon Border Adjustment Mechanism versus them establishing an emissions trading system domestically and collecting those revenues through that system.

It will also then trigger their realization that they also need to potentially look at managing their own carbon leakage risk, and you then see more and more CBAMs appearing as a result. The next one will be the UK CBAM, depending on the UK-EU discussions this spring-summer about the ETS linkages.

But really, I mean, it boils down to the fact that we, as businesses, moving these carbon-intensive goods around the world today, the matrix looks across variables like price, availability, quality, and then the logistics component. And really carbon is just going to become another factor within that matrix. And so when we think about where our business is going and how we're really supporting clients, it's really focused around carbon insights, and being able to enable you to understand that if you're moving goods from two different countries, these are the costs that you're looking at, specifically on the carbon intensity side, and then here's how you can look to manage that based on the availability of material at a certain carbon intensity where you're optimizing ultimately around those benchmark intensity figures that will continue to decrease as the world look to hit on net-zero objectives.

Dan Maleski:

If I could add, when I speak with people about CBAM, and if we take the perspective that this is for carbon leakage, which it is, but at the same time, there's also a bit of delusion of what that actually means.

So let's take the example of the US automotive industry that has, to an extent, left widely the US to other countries for one simple reason, which is it's cheaper to do so. Because America at that time was an asymmetrical landscape, higher wages, higher variable costs. And so that's exactly what happened in Europe. If I'm making cement and steel, it's just more expensive in this case because of CBAM, sorry, cost of carbon, therefore I offshore. And so offshoring doesn't take place because of cost of carbon. Offshoring takes place because it's just more expensive to do business in that jurisdiction. Now, the issue with countries responding to the CBAM with a cost of carbon is they might be reluctant to incorporate that high of a cost of carbon.

If I look at a lot of ETSs in the world, I believe there's 38 of them, most of them have a very soft cost carbon. What does that mean? See, it's not actually the dollar amount, what that cost is trading at, it's the underlying structure of that market. EU ETS is an absolute cap. A lot of markets have a relative cap. EU ETS has phased out free allocation quite significantly. Most jurisdictions have not done that.

So not only they have a softer cost of carbon, but those costs are getting watered down via free allocation as well as they're not covering the same emissions. Because at the end of the day, a country doesn't want to incur significant costs if that is their USP. If I am an exporting country and I'm industrial reliant, my entire USP is either being able to produce something at a significantly lower cost or being able to produce a lot of it and potentially flooding it, i.e. dumping.

And so if I incorporate that cost of carbon, if I'm China, if I actually incorporate a cost of carbon that's equal to my European counterpart, and that's taking a break in my economy. And so they're going to be looking at this question not from a climate change perspective, rather from a fiscal responsibility, "Should I shoot my USP in the foot?" Now, of course, this creates innovation, right? If you create a challenge, a problem, you can hopefully find a reason to solve that. But as a result of this though, I might be hesitant to look at every country responding to CBAM with an ETS as the same. They're not all apples and apples. A lot of them is apples and oranges if you look at how these ETSs are structured. But those are the conversations we're having with governments and our clients, and that's what their concerns are, especially lately.

Eklavya Gupte:

Thank you, both. It'd be interesting to see how carbon pricing mechanisms have to evolve, especially with more turbulence in geopolitics and in global trade in the next few years. We will keep an eye on this topic at S&P Global Commodity Insights. The Energy Evolution Podcast is hosted by me and Taylor Kuykendall, and I would like to give special thanks to our wonderful podcast team members, Camilla Naschert, Dan Testa, Christopher Coats, and Karen Willenbrecht. This series is produced by our stellar agency partner, The199, and the Commodity Insights digital content team. Thank you, all, for listening.