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Navigating the Carbon Border Adjustment Mechanism (CBAM): Insights from the Korea-Europe Carbon Neutrality Forum

October 24, 2023 | Forum
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The Carbon Border Adjustment Mechanism (CBAM), a new policy proposed by the European Union (EU), has sparked significant discussions in South Korea, a major exporter of carbon-intensive products to the EU. While aiming to establish a fair playing field for carbon pricing among EU member states and non-member countries, the CBAM presents both complex challenges and promising opportunities for South Korea's economy and its transition to a greener future.

In this context, KEY, in collaboration with Yonsei University's EU Jean Monnet Center and KOSSREC, successfully organized the Korea-Europe Carbon Neutrality Forum, on October 24, 2023. The event attracted policymakers, business leaders, and academics, providing a platform to delve into the implications of CBAM and corporate responses to achieve carbon neutrality.

Understanding the CBAM and its Impact on South Korean Companies

The first session, moderated by Dean Yeonho Lee from Yonsei University, featured Jorg Weberndorfer from the EU Delegation to Korea who presented on CBAM, as well as panelists from KIEP, POSCO Research Institute, National Assembly Research Service, KB Bank, and Kim & Chang, who discussed CBAM's regulatory framework, its impact on Korean businesses, and implementation timeline.

CBAM: Background and Implementation stage - Presentation by Jorg Weberndorfer (EU Delegation to Korea) 

The Carbon Border Adjustment Mechanism (CBAM) is a new regulation adopted by the European Union (EU) that entered into application in its transitional phase from October 2023 to combat climate change through the eviction of carbon leakages. It is an essential part of the EU Green Deal and Fit for 55 package - a set of proposals to revise and update existing EU law to make sure the EU policies are in line with the EU climate goals – which intend to reduce net greenhouse gas emissions in the EU by at least 55% by 2030.

 

The CBAM introduces a carbon price on imports of certain types of products with a high risk of emissions to prevent the relocation of production to countries that have lower or lax carbon emission standards compared to the EU and which result in so-called “carbon leakages”. The initial scope of the CBAM targets the imports of six industries into the EU: cement, iron and steel, aluminum, fertilizer, electricity, and hydrogen. It is based on four principles:

  1. It mirrors EU carbon pricing through a new mechanism for imports into the EU

  2. It complies with the World Trade Organization principles and is in line with international trade rules

  3. It addresses companies, not countries, and is based on the actual carbon content of the imported goods

  4. It focuses on carbon-intensive sectors

The CBAM is a supplementary measure to the Emissions Trading System (ETS) of the EU, established in 2005. The ETS is a cap-and-trade system that sets an annual cap on the amount of greenhouse gases that companies in covered sectors may emit. Implemented in all EU countries and Iceland, Liechtenstein, Norway and Switzerland, the ETS helped to reduce the EU carbon emissions by 37% since 2005. The CBAM aims to strengthen the current ETS by preventing carbon

leakages and progressively replacing the ETS system of free carbon allowances. Starting October 2023 until December 2025, the transitional period of CBAM implementation will require quarterly emission reports by importers before the obligation of purchasing CBAM certificates is introduced in 2026 onward. The transitional phase is a learning period for all stakeholders, during which they need to understand their respective roles and tasks and collect information to facilitate the smooth rollout of the mechanism after 2025. The data gathered, and experience feedback will allow the European Commission (EC) to review the mechanism and methodology by 2025 and find synergies with existing monitoring schemes. The EC will present two reports before the end of the transitional phase in December 2025: one considering the report methodology and the second identifying products that might be incorporated into the CBAM requirement of carbon declaration. To help companies adapt to this new system, the EC will provide guidance and support, as well as communication channels and training to companies.

The panelists emphasized that the current CBAM regulations may not adequately address the fundamental issues surrounding information disclosure, measurement discrepancies, and regulatory gaps. They stressed the need for refined regulations that effectively tackle these challenges and incentivize companies to adopt technological measurement systems to minimize costs and expedite the verification process.

 

As noted by Hyesung Kim (Attorney at Kim & Chang), obtaining sensitive information from importers regarding their production processes and emissions data can be challenging, particularly when dealing with smaller companies with limited resources or expertise in carbon footprint tracking. Technological measurement systems can play a pivotal role in streamlining the verification process, reducing administrative costs, and enhancing efficiency and transparency.

 

Jeongwoo Lee, Head of ESG Consulting at KB Bank, shed light on the impact of the CBAM on South Korean subcontractors, mainly small and medium enterprises (SMEs), which are struggling to comply with EU ESG guidelines and CBAM. These subcontractors are under pressure from larger corporations like Samsung and SK, which are required to adhere to EU regulations for their sustainable export goods.

 

The discussions in Session 1 highlighted the pressing need for regulatory alignment between the EU and South Korea to overcome challenges posed by CBAM implementation. Harmonizing regulations and addressing measurement discrepancies emerged as key priorities for creating a more effective and equitable framework for carbon pricing and emissions reduction.

Embracing Technological Innovations for a Carbon-Neutral Economy

During Session 2, which was fully organized by KEY, Philippe Li, President of KEY and attorney at Kim & Chang, led the discussion with representatives from GTT, Veolia Korea, Carbios and SK Geo Centric, which followed a presentation by Joseph Dellatte from Institut Montaigne (“Decarbonization policies in the EU”). Each of these companies is actively building its business model to adapt to a carbon-neutral economy through technological innovations.

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Decarbonization Policies - Presentation By Joseph Dellatte (Institut Montaigne)

The EU intends to be the world's first climate-neutral continent by 2050 and has enshrined that objective into its Climate Law. Accordingly, carbon emissions must drop to a net-zero level by mid-century through reductions and removals. To give itself the means to achieve its ambitions, the EU implemented different pro-climate policies and mechanisms.

 

First is the EU Green Deal, which makes climate a shared competence between the EU and Member States: Brussels sets binding targets in areas where progress must be made to meet common objectives, while national governments can set their own legally binding targets in areas where the EU does not exercise its powers. One key element of the EU Green Deal is RePowerEU, a European Commission (EC) proposal to end dependence on Russian fossil fuels by 2030 in response to the Russian invasion of Ukraine in 2022. Its three pillars are energy saving, clean energy production, and supply diversification.

Second is the Fit for 55 package, a set of 12 legislative proposals published by the EC in 2021, which aims to propose concrete actions to achieve the EU's objectives of reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. It comes with new rules governing clean energy, energy efficiency and transport, among others, that have been introduced to meet this target. It also plans the reform of the EU Carbon pricing schemes and the introduction of a social climate fund.

Third is the EU Emissions Trading Scheme (ETS), designed to put a price on carbon emissions from industry and energy sectors to transportation. ETS is reinforced and will ultimately be replaced by the CBAM, which puts a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU and encourages cleaner industrial production in non-EU countries.

A critical part of the EU's climate ambitions is the energy policies and decarbonization target. The energy mix is a competence of the Member States, but the EU is taking key reforms to facilitate decarbonization and the decoupling of Russian energy resources. An electricity market reform is in negotiation to incentivize the clean energy transition by enabling better support for renewables and clean energies, helping consumers benefit from the cheap costs of renewables through heightened competition between industries and better connections between EU member states. The case of nuclear energy in the European energy mix and the electricity market reform are particularly sensitive and highly debated between Member States, with some states being pro and anti-nuclear. Central issues regarding this topic are, first, the funding for developing new or refurbishing old nuclear plants and, second, the role of nuclear in electricity pricing. Changes to be expected with the 2024 European elections and the precision that should be added to some texts of the Fit for 55 package are still to be further designed and approved. The question of financing the clean transition - at the European or national level - will also need to be clarified.

“These targets which were considered unachievable some years ago have become possible in 10-20 years and this is a fascinating change” – Philippe Berterottière, CEO of GTT

Philippe Berterottière, CEO of GTT, emphasized GTT's long-standing commitment to developing technologies for the shipping industry, particularly in the transportation of energy. Philippe Berterottière, who is also the President of the Strategic Committee of the Ocean Industry, shed light on the significance of the oceans as a carbon pump, absorbing 20-30% of human-generated CO₂ and as an oxygen producer and thermal buffer, absorbing 93% of the heat generated by human activities. He stressed the vital importance of preserving and caring for the oceans, acknowledging that their condition is a matter of concern for us all. His intervention accentuated the potential of technological advancements in enabling the achievement of targets previously deemed unattainable within 10 to 20 years. He underscored the importance of defining collective targets and emphasized that this transformative change must be a collaborative endeavor involving concerted efforts from various stakeholders.

“We have to go from ecological transition to ecological transformation” – Hervé Péneau, CEO of Veolia Korea

Further enriching the discussion, Hervé Péneau, speaking for Veolia Korea, emphasized Veolia’s 170-year legacy in addressing social and environmental issues. Hervé Péneau emphasized that half of the technology required for future operations may not yet exist. This innovative approach positions us at the early stages of a crucial phase, where decarbonization, depollution, and the circular economy serve as driving forces. He stressed the importance of moving beyond mere ecological transition to a more comprehensive ecological transformation, emphasizing the need to introduce novel solutions that benefit people and societies.

“It’s not like carbon neutrality is punitive to companies but it can be achieved with new technologies that will create new business for new industry” – Stéphane Ferreira, CBO at Carbios

Adding to the discourse, Stéphane Ferreira, CBO at Carbios, provided a unique perspective representing a biotech company dedicated to leveraging nature to address plastic waste. Carbios' innovative approach involves breaking down plastic waste to regenerate it into virgin plastic. Their groundbreaking technology targets plastic waste from various industries, extending to textiles like polyester. What sets Carbios apart is their close collaboration with brands to comprehend consumer expectations. Stéphane Ferreira shared the results of a survey conducted across Europe, the Americas, and Asia involving 6,000 participants. The survey revealed a unified concern across these regions regarding global warming, with particular emphasis of ocean pollution. People's sensitivity to these issues reflects a collective sentiment and prompts consideration on how to actively contribute to their resolution. He emphasized the potential of new technologies in creating a new economy. According to Carbios, achieving carbon neutrality does not have to be punitive but rather a catalyst for new business and industries through innovative technology.

“We need a different set of technologies and this requires two things: time and capital” – Jeongho Yeo, Vice-President of SK Geo Centric

Finally, Jeongho Yeo, Vice-president of SK Geocentric, a prominent South Korean petrochemical company, offered valuable insights. The company, formerly SK Global Chemical, underwent a name change in 2021 to signal its commitment to global leadership in plastic waste recycling. SK Geocentric is actively investing in cutting-edge technologies to achieve its ambitious goal of becoming the world's largest urban oil field company using recycled plastic waste and recently announced the construction plan of its Advanced Recycling Cluster in Ulsan, South Korea. Once the construction will be completed in 2025, the company will become the first in the world to operate multiple chemical recycling facilities at one location, covering an area equivalent to 22 soccer fields.

The contributions from GTT, Veolia, Carbios and SK Geo Centric collectively outline a vision for leveraging technology, social consciousness, and consumer-driven approaches to guide industries toward environmental responsibility. Recognizing the need for new technologies and a fundamental shift in how businesses operate, they demonstrate a shared mindset working toward a sustainable and environmentally conscious future. Their joint efforts align with the idea that environmental challenges can be turned into opportunities for positive change and economic growth.

Key takeaways of the Forum

Exploring how the CBAM mechanism works and how companies aim to be more eco-friendly showed participants how policies, industries, and the global market all connect and affect each other. They learned how crucial it is to have both strong rules and a vision for effective plans. This dual approach ensures that rules are being followed while also encouraging new ideas. Participants also learned that only half of the needed technologies are currently known, revealing the urgency of investing in cutting-edge solutions to address environmental issues and move towards a sustainable future. The Forum also highlighted the importance of working together to reach carbon neutrality. Partnerships were identified as critical catalysts for progress throughout the entire supply chain. The discussions emphasized the significance of collective strategies, stressing that the collaboration of various stakeholders is pivotal in achieving ambitious goals. Lastly, the Forum acknowledged that what people think and how motivated they are can make a big difference. Public sentiment and people's eagerness to make a change are powerful forces that can drive meaningful actions.

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GTT, Gaztransport et Technigaz (GTT), was founded in 1994 and is a French naval engineering company that develops containment systems for maritime transport and cryogenic storage of liquified natural gas (LNG). It offers engineering services, consultancy, training, maintenance assistance and technical studies. Renowned for their safety, reliability, and efficiency, GTT's systems are employed in various applications, including LNG carriers, storage tanks, and regasification terminals. In Korea, GTT has established a strong presence, collaborating with Korean shipyards to provide cutting-edge LNG containment solutions. The company's expertise has been instrumental in numerous Korean LNG projects, contributing significantly to the country's growing LNG industry. Beyond LNG containment systems, GTT offers a comprehensive range of services, including engineering studies, project management, training and after-sales support.

Carbios is a French biological chemistry company founded in 2011 and specializing in the design and development of enzymatic processes for the biodegradation and bio-recycling of plastics. Through its innovative approach combining biotechnology and plastics engineering for the first time, Carbios brings major innovation in plastic and textile life-cycle management. Thus, it seeks to respond to consumers' news societal expectations and the challenges of the ecological transition facing governments and manufacturers in combating both plastic and textile waste pollution. Carbios has been active in Korea for several years. In 2019, the company signed a memorandum of understanding with the Korea Petrochemical Inducement Co., Ltd. (KPIC) to explore opportunities to commercialize Carbios' technology in Korea. In addition to its partnerships with Korean companies, Carbios is also working with the Korean government to promote the development of a circular economy for plastics in Korea.

Veolia is a French multinational and world leader in public services. Established in Korea in 1999, the company provides a comprehensive range of waste, water and energy management services designed to contribute to the circular economy and preserve scarce materials. With cutting-edge technologies and pioneering experiences, Veolia leads the environmental industry, providing operation and maintenance, engineering, procurement and construction services for facilities, chemicals services, and supplying consumables for water treatment. It employs around 1,300 employees in Korea and manages 51 operation sites nationwide.

SK Geo Centric has been a pioneer of the Korean chemical industry since the inception of its first petrochemical production site in 1972. The company provides advanced materials for automobiles, electronics, telecommunications, consumer goods, etc. The company has recently expanded its product portfolio to include eco-friendly plastic products as a means of establishing a sustainable plastic value chain. For example, SK will build the first European plastic recycling plant in France in collaboration with partners French SUEZ and Canadian Loop Industries. The site will produce 100% recycled and infinitely recyclable virgin-quality polyethylene terephthalate (PET) resin. The project is expected to save more than 250,000 tons of CO₂ compared to virgin PET resin from fossil fuels.

About the Authors

Émilie Luthringer

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Project manager at the Asia Society Switzerland, Publication mission manager for IRIS

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Jeemin Chun

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Director at KEY, PhD (SNU), Master's  Degree International Relations (Science Po)

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