The fight to stabilize our changing climate is accelerating worldwide. New decarbonization action plans and corporate climate risk disclosures are becoming mainstream, moving sustainability to the forefront of business decision-making. And now recently announced climate legislation from the EU and a similar proposal from U.S. lawmakers may change the rules of international trade as we know them.
The European Commission unveiled its package of proposals, known as “Fit for 55,” which is designed to help meet the EU’s ambitious climate goal of cutting greenhouse gas emissions by 55% by 2030. Among the proposals is the Carbon Border Adjustment Mechanism (CBAM), which will tax imported goods based on the greenhouse gases emitted to make them, focusing on high-emission industries, such as steel, cement and aluminum. In the U.S., congressional leaders are proposing a similar scheme, as part of their $3.5 trillion budget plan.
With the U.S. and EU putting carbon emissions at the forefront of trading policy, U.S. businesses must prepare now, or could face a competitive disadvantage later. It’s inevitable that growing swaths of U.S. and international trade will be governed by carbon pricing moving forward, and businesses that fail to take these issues seriously run the risk of being overtaken by competitors. Companies that measure and manage their carbon footprint now could gain a competitive advantage over the longer term.
A Closer Look
The EU’s CBAM proposal is at the forefront of international climate change efforts and primarily affects companies selling into or operating in EU markets. As congressional leaders finalize a tax on imports in their new $3.5 trillion budget plan, a large question remains—what exactly would a carbon border tax mechanism look like if implemented in the U.S.?
Similarly to the EU’s plan, the proposed U.S. policy would identify a set of carbon-intensive goods to tax. If this is the case, U.S. companies would pay more for those imports, based on a yet to be determined method of measuring and verifying carbon content. Such a border tax would have effects much like the last administration’s tariff policies—picking out countries and goods, and raising their prices via trade policy. Its practical effects would include sourcing decisions for importers, such as sourcing less expensive steel from other locations.
Plus, the level of taxation matters. The EU CBAM has the potential to generate about $10 billion in revenue—in a $15 trillion economy, that’s less than 0.1% of total GDP. The EU generates over 3 billion tons of CO2 annually, and carbon prices on the EU market are expected to exceed $50 per ton in the next few years. That’s over $150B in carbon revenues—the CBAM would add less than 10% to that total. The U.S. proposal is estimated to raise about $16 billion, in the somewhat larger U.S. economy, and so would have comparable effects. These numbers suggest that unless carbon prices grow, total economic impacts would not be huge, though the most carbon-intensive sectors could see noticeable effects.
In either case, smart businesses can leverage market-based initiatives to advance voluntary carbon reporting and reduction strategies that will cost less compared to rigid government pricing policies.
How Businesses Can Adapt
To prepare for such carbon pricing plans, smart businesses must proactively respond to these shifts, by working to leverage market-based initiatives that use voluntary carbon reporting and reduction systems. Fortunately, some of the world’s biggest and most forward-thinking companies are already doing this.
The first step is to seek direct emission reductions in a company’s own footprint, across its buildings, production operations and fleets. In the buildings industry, for example, a number of energy rating and certification programs are used to benchmark and improve energy and emissions performances. The ENERGY STAR program allows building owners and product buyers to certify the performance of new homes, existing commercial and multifamily buildings, industrial plants and consumer and business products. In many cases, companies self-organize to establish rating and labeling systems, such as the energy efficiency certification of windows, doors and skylights self-administered through the National Fenestration Rating Council.
Seeking low-emissions energy supply is another common step in reducing the company footprint. Market-based initiatives such as RE100, managed by The Climate Group in London in partnership with environmental non-profit CDP, brings together the world’s most influential businesses to commit to 100% renewable energy sourcing. RE100 has over 300 members worldwide, including Adobe, Facebook, General Motors, Google and Starbucks.
For most companies, achieving deeper emissions cuts—and especially attaining the net-zero emissions performance that many companies have committed to—will require offsets for emissions that can’t be reduced directly. This may mean buying renewable energy certificates through a program like RE100, or purchasing nature-based offsets from agricultural carbon credit programs. In many cases, offsets will be limited by type, by percentage of compliance and by geography, and will usually be subject to strict rules of measurement, verification, additionality and other criteria.
In addition to taking steps to reduce the company’s emission footprint, it’s important to register with credible organizations that can verify and certify the quality and realization of results. A leading U.S. player in this space is CDP—the group provides a rigorous system of greenhouse gas emissions footprinting and reduction documentation, and scores companies on their performance. These scores can improve a company’s bottom line by demonstrating their competitive performance, transparency and proactiveness in managing risks. Some of the companies ranking highly on the CDP’s list include Mitsubishi Electric, AstraZeneca, HP Inc. and Toyota.
The Task Force on Climate-Related Financial Disclosures provides another forum, focused on climate-related disclosures to promote more informed investment, credit and insurance underwriting decisions. This forum helps stakeholders better understand the risks of carbon-related assets in the financial sector.
The Road Ahead
Business leaders across the U.S. must step up their efforts to measure, report and reduce their carbon footprint, as part of the larger climate risk management strategies. Not only are the EU’s “Fit for 55” and U.S. congressional leaders’ proposal creating market signals, but the Biden administration at large is also continuing to ramp up climate risk reporting requirements, adding urgency to businesses’ need to act.
Some of the world’s most profitable companies have been documenting their climate risks and carbon footprints for a long time, incorporating sustainable strategies into their supply chain operations and business plans. More and more companies recognize that proactive stances on climate will help their bottom lines, and these actions are another wakeup call for large global organizations that the time to act is now. No company needs to act alone—a range of industry-driven initiatives can help navigate this new green-focused business future.