Korea devising strategy for dealing with EU carbon border tax

The carbon border adjustment mechanism (CBAM) will require importers to buy permits for their carbon emissions in the same way as producers in the EU trading bloc do under its emissions trading system.

Smoke and steam billow from a steel plant run by Posco in Pohang, North Gyeongsang. [YONHAP]

The Korean government and corporations are scrambling to respond to the EU’s carbon border tax on imports as the regulation could cost Korean manufacturers.

EU lawmakers agreed Tuesday to introduce the world’s first carbon border tax for a number of items, such as iron, steel, cement and aluminum. A trial is set to begin next year. Fertilizer, hydrogen, screws and bolts are also on this list.

The carbon border adjustment mechanism (CBAM) will require importers to buy permits for their carbon emissions in the same way as producers in the EU trading bloc do under its emissions trading system.

Bang Moon-kyu, minister for government policy coordination, convened an emergency meeting following the passage of the provisional agreement to deliver objections and devise responses. Other ministries joined.

Steel makers will likely be hit hardest, as steel is one of Korea’s major export items to EU. Korea’s steel exports to EU totaled $4.5 billion last year, while aluminum exports stood at $500 million and fertilizer $4.8 million.

“We need to bolster infrastructure and the size of the workforce for carbon emission management and verification sectors as the CBAM will impact exports to EU,” Bang said in a statement.

A trade negotiation division at the Ministry of Trade, Industry and Energy will take the lead in discussing specifics of the implementation with EU, according to the statement.

With the formal imposition of the scheme, Korean companies will have to pay 290 billion won in carbon border taxes in 2023 and 710 billion won in 2030, according to EY Han Young.

The reliance of steelmaking on coal is one factor.

Major producers like Posco and Hyundai Steel are developing alternative methods, such as using hydrogen, but the actual adoption is far from near.

Posco’s first pilot project for hydrogen-based steel-making will start in 2028 if all things go as planned.

Economists have warned that the country should be better prepared for stricter environment regulations.

Kim Seon-jin, a senior economist at the Bank of Korea, estimates that the carbon border tax in the EU could translate into a contraction of Korea’s overall exports by 0.5 percent.

“The tax negatively affects exports by deteriorating the price competitiveness of Korea’s exported goods,” Kim wrote in a report released last year.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]