BOSTON, June 30, 2020 /PRNewswire/ -- A plan that is
being considered by the European Commission to tax the carbon
emissions attributed to imported goods could create competitive
advantages for foreign companies with small greenhouse gas
footprints—and have financial repercussions for other exporters,
adding to the financial strain caused by the COVID-19 crisis. The
tax could slash the profits that are generated by imported
materials, such as crude oil, flat-rolled steel, and wood pulp, by
10% to 65%, and the tax could impact European Union and non-EU
producers of such goods as chemicals and machinery, according to
new research released today by Boston Consulting Group (BCG).
The study, which is described in an article titled "How an EU
Carbon Border Tax Could Jolt World Trade," found that an EU carbon
tax on imports could rewrite the terms of competitive advantage in
one of the world's biggest markets. Higher prices for Russian crude
oil, for example, could cause European chemical producers to import
more oil from Saudi Arabia, where
extraction methods leave a smaller carbon footprint. And steel that
is produced in Chinese or Ukrainian mills using blast furnaces
would become less competitive in the EU against steel from other
countries that is made in more carbon-efficient mills.
The details and timing of the policy are still to be determined
and must be approved by legislators. But the article contends that
some sort of carbon-pricing mechanism is likely to be imposed on
imports—and companies should prepare.
"Whatever policy is adopted, the size and strategic importance
of the EU market means its action could transform the fundamentals
of global advantage," said Johan Öberg, a BCG managing director and
senior partner who coauthored the article. "Companies around
the world will be compelled to manage their carbon footprints with
greater urgency."
A carbon border tax is one of several mechanisms that the
European Commission is considering as part of the European Green
Deal, a bold initiative to cut greenhouse gas emissions in the EU
by 50% over the next decade—compared with the current target of
40%—and make Europe the world's
first climate-neutral continent. The president of the European
Commission, Ursula von der Leyan,
has recently called the European Green Deal a key element of the
region's post-COVID-19 economic recovery. A carbon tax on imports
also has strong support among European manufacturers. Many have
been paying for carbon emissions since 2005 under the EU's
Emissions Trading System, and they have wanted a more level playing
field against importers, especially those from nations with more
lax environmental standards.
The BCG study assessed the impact of a potential carbon border
tax on a wide variety of industrial sectors in different countries.
The study assumed that the initial levy will be set at $30 per metric ton of CO2
emissions—one potential scenario. The degree of impact on
industrial sectors would be largely influenced by their carbon
intensity—the relative propensity to contribute to the so-called
greenhouse gas effect—and trade intensity, the degree to which
goods in that sector are traded. The study also estimated the tax's
impact on the profits that are generated by exports to the EU in
each sector.
Considering the effects of the tax on competitive advantage and
profits, the sectors that would be hit most directly are those that
produce refined petroleum products, coke (a key input in steel
manufacturing), and mining and quarrying products. The tax would
reduce the profitability of crude oil shipments to the EU by about
20%, on average, for example, assuming crude oil prices remain in
the range of $30 to $40 per barrel. The total profit pool generated
by EU imports of wood pulp would shrink by 65%, on average.
Sectors such as basic metals, chemical products, and paper
products, while less dependent on trade, would also be directly
affected because of their high carbon intensity. The tax would
slash the profit pool generated by imported flat-rolled steel
products, used by automotive and machinery makers and construction
companies, by about 40%, on average. In terms of commodity steel,
Chinese and Ukrainian industries, which mostly produce steel using
blast furnaces and basic oxygen furnaces, would be hit much harder,
on average, than those of Canada
and South Korea, where a greater
portion of steel comes from mills using cleaner electric arc
furnaces.
Because the costs of the carbon border tax would be felt far
downstream in supply chains, it would impact companies in every
sector, whether they are European or non-European. Owing to the
size of the EU market, the tax is also likely to intensify pressure
on companies and governments around the world to take stronger
measures to limit emissions. Companies in nations with their
own carbon-pricing schemes, such as Australia, Canada, and Japan, may be exempt if their governments
negotiate new trade pacts with the EU or update existing ones.
Despite the uncertainties surrounding the price mechanisms and
the timing of the policy, CEOs should start preparing now for some
form of an EU carbon tax on imports. The article recommends that
companies begin measuring their carbon footprints, tracking carbon
pricing and its impact on their costs, building a playbook of
actions to take under various scenarios, and working with
governments to help shape policy.
"The best performers in each sector will not only enjoy a
competitive edge in Europe," said
Marc Gilbert, a BCG managing
director and senior partner who leads the firm's work in
geopolitics and trade. "They will also have a head start against
less adaptable rivals in other markets as more nations embrace
financial incentives to push companies to accelerate the fight
against climate change."
A copy of the study can be downloaded here.
To arrange an interview with one of the authors, please contact
Eric Gregoire
at +1 617 850 3783 or gregoire.eric@bcg.com.
About Boston Consulting Group
Boston Consulting Group
partners with leaders in business and society to tackle their most
important challenges and capture their greatest opportunities. BCG
was the pioneer in business strategy when it was founded in 1963.
Today, we help clients with total transformation—inspiring complex
change, enabling organizations to grow, building competitive
advantage, and driving bottom-line impact.
To succeed, organizations must blend digital and human
capabilities. Our diverse, global teams bring deep industry and
functional expertise and a range of perspectives to spark change.
BCG delivers solutions through leading-edge management consulting
along with technology and design, corporate and digital
ventures—and business purpose. We work in a uniquely collaborative
model across the firm and throughout all levels of the client
organization, generating results that allow our clients to
thrive.
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SOURCE Boston Consulting Group (BCG)