Builders and farmers face price rises when new climate change rules kick in

New climate change tariffs mean the Irish construction and farming sectors will face potentially significant additional costs from the start of next year. The extra charges come as businesses are already struggling to address rising raw material and labour costs.

The Carbon Border Adjustment Mechanism was announced last summer as part of the European Union’s Fit for 55 plan to reduce carbon emissions by 55 per cent by 2030. The aim is to prevent so-called carbon leakage, where companies move carbon-intensive production outside the bloc to countries with more relaxed environmental standards and fewer carbon taxes.

From January, it will force Irish and EU importers to buy carbon certificates that correspond to the price that would have been paid had the goods been produced under the bloc’s domestic carbon pricing rules.

Initially, the tariff will apply to five categories of goods considered to be at high risk of carbon leakage, namely imports of iron and steel, cement, fertilisers, aluminium and electricity generation from non-EU countries.

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According to figures published by the Central Statistics Office (CSO), about €1 billion of goods could be subject to the new tariff, with Ireland importing about €286 million of manufactured fertiliser last year and €731 million of iron and steel.

However, if the producer is based in a country that has its own emissions trading system, Irish and other EU importers can fully deduct those costs from the price of their carbon certificate. Analysis by Rabobank last year revealed that of the main exporters of products falling under the Carbon Border Adjustment Mechanism initially, just three — China, South Korea and the United Kingdom — have their own emissions trading system in place.

It means that Irish and EU importers of the products affected from other countries will face additional costs. Ireland imported roughly a quarter of its fertiliser from Russia, Belarus and Ukraine last year, for example, which could be subject to the new tariff from next year.

Fertiliser prices have already climbed nearly 178 per cent in the 12 months to the end of April, according to the CSO, a consequence of the Russian invasion of Ukraine and general global supply chain issues. That is already impacting farmers and food prices. It is unclear at this point exactly how high the tariffs will be and the figure could vary depending on the country of origin of the affected imports.

Woodland Group, a UK-headquartered freight forward and supply chain consultancy with a presence in Ireland, is telling its Irish clients they will have to begin calculating the potential cost impact of the adjustment mechanism on their business and supply chain flow.

At the time it was announced as part of the Fit for 55 package, the proposal was welcomed by the Government, environmental bodies and business groups including Ibec, which cautioned that it would have to work “in harmony” with the EU’s existing emissions trading system.

In a briefing article, written in collaboration with customs expert Brian Murphy, managing director of GlobalTrade Ireland, Woodland said that combined with other legislative changes proposed by the EU, the tariff will “shape business’ processes and global supply chain management” over the coming years.

The new tariff “will effectively put a tangible price on carbon in the supply chain,” Woodland and Mr Murphy said, placing “sustainability at the forefront from a corporate balance sheet perspective as much as an environmental one”.

It will also help to reduce the risk of carbon leakage “by encouraging producers in non-EU countries to review and ‘greenify’” production.

But it warns that Irish and EU businesses generally will have to be proactive in advance of the scheme’s introduction next year.