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A Study on Korean SMEs Policies for the Carbon Border Adjustment Mechanism (CBAM) Economic development, Trade policy

Author Hyeri Park and Ji Hyun Park Series 21-06 Language Korean Date 2021.12.30

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   In July 2021, the EU announced the Carbon Border Adjustment Mechanism (CBAM), which obligates importers to purchase certificates corresponding to the emissions embedded in imported products. Implementation of the CBAM will have a negative effect on the Korean economy, which is highly dependent on trade and carbon-intensive industries. Another point of particular concern lies in that domestic SMEs will also be affected by the CBAM directly or indirectly. Therefore, this study examines the impact of the CBAM on SMEs in Korea, and evaluates different industries for their vulnerability to the CBAM. Implications for government policies and strategies for SMEs to effectively respond to CBAM are drawn.
   This study differs from previous studies in that it analyzes the impact of the CBAM from the perspective of SMEs. Few domestic studies have analyzed the impact of the CBAM on SMEs. This study examines various aspects of the CBAM, including statistical analysis of vulnerabilities to the CBAM in the area of SMEs, and case studies of carbon neutrality support policies for SMEs in major countries. Various analysis methods are attempted, such as measuring the export status of SMEs’ CBAM target items and domestic SMEs' distribution of CBAM target industries, evaluating the SMEs’ vulnerability to the CBAM by sectors, and measuring carbon emissions embedded in SMEs’ exports. Moreover, overseas carbon neutrality support policies for SMEs are investigated to identify recent policy trends in major countries and learn from benchmarking cases.
   Chapter 2 discusses the major issues of the CBAM. As the CBAM is expected to expand in the future, response strategies for the CBAM are needed not only in the steel industry but also in other industries. Moreover, if composite materials and indirect emissions are included in the scope of the CBAM, SMEs are also directly subject to CBAM regulation. Therefore, SMEs should prepare an adaptation strategy for the CBAM through active communication with the government while paying attention to the implementation progress. The government should carefully establish its position on the CBAM, while monitoring responses in other countries to the CBAM and cooperating with major countries. The Korean government should also make preparations on issues for bilateral CBAM consultations with the EU.
   According to the analysis results in Chapter 3, while direct exports to the EU by Korean SMEs do not account for a large proportion of items falling under the scope of the CBAM, it is confirmed that the impact on domestic SMEs increases when indirect exports are taken into account. When considering indirect exports, the sectoral vulnerability to the CBAM appears in different patterns from when indirect exports are not considered, and it is also found that vulnerability to the CBAM differs by sector.
   Chapter 4 investigates carbon-neutral policy cases for SMEs in Korea and major countries. In Korea, it appears that SME support policies related to carbon neutrality are mainly composed of short-term projects, and there is no long-term support policy. In addition, it is found that domestic SMEs lack the ability to respond to the CBAM and carbon neutrality, and SMEs have more demand for policy financing than strengthening their capabilities for carbon neutrality.
   The results of this study yield the following important implications.
   First of all, a phased response strategy is needed according to the timing of CBAM implementation. The role of the government is important during the CBAM transition period (2023-25). In order for SMEs to adapt to the CBAM, the government should provide information about the CBAM, prepare education programs, and design support systems for SMEs. If the CBAM is implemented after 2026, substantial response actions by the government and companies should be prepared. An integrated carbon-neutral data management system and advisory agency for SMEs should be established, while forming cooperational networks between large companies and SMEs. In the long run, SMEs should prepare export strategies to cope with the era of carbon neutrality. At the same time, they should de-carbonize their production processes and develop low-carbon, high-value-added products, and the government should participate in international discussions and negotiate the conditions of CBAM implementation.
   The detailed response strategies by the government and SMEs to the CBAM are recommended as follows. First, the government should come up with a long-term carbon-neutral support policy that focuses on SMEs. Second, when it comes to response strategies to the CBAM, indirect export as well as direct export must be considered. If the CBAM is expanded in the future and all supply chains are included in the scope of CBAM regulations, SMEs will also be subject to CBAM regulations. Therefore, the CBAM affects domestic SMEs through direct or indirect channels, as exporters are expected to force suppliers to comply with environmental standards and demand the supply of eco-friendly intermediate goods. Third, it is necessary to develop various types of carbon reduction programs that can promote SMEs' participation in carbon neutrality. Export support systems for environmental products and technologies, carbon reduction support through ICT, local government carbon neutral support policies, and cooperation between SMEs and large companies can be benchmarked from overseas cases. Fourth, the policy direction for carbon neutrality support for SMEs should prioritize implementation of support for eco-friendly process transition, followed by the provision of incentives based on carbon neutrality performance. Fifth, support policies for SMEs should be designed considering conformity with WTO agreements. Finally, a control tower that supervises SME carbon neutrality policies should be established. We propose the launching of an "SMEs Carbon Neutral Response Team" or “CBAM TF” dedicated to SME policies.
   SMEs must accurately inform themselves on the scope of the CBAM and international discussion on the CBAM, because the impact of the CBAM on domestic SMEs depends on how far its scope extends. Second, SMEs should actively participate in the carbon neutral policy design from the initial stage so that the specificity and difficulties of SMEs can be reflected. Third, the ability to respond to the CBAM should be strengthened. SMEs should secure professional manpower with CBAM-related administrative capabilities, reporting capabilities, and verification systems by making the most of government support during the CBAM transitional period. Fourth, it would be more effective to formulate response strategies by industry. Carbon emissions, reduction efficiency, and reduction technologies all vary by industry. Therefore, an effective approach would be for each company to participate in the development of benchmarks for their respective industries, develop standards for reporting emissions by industry, and share best practices. In addition, since the vulnerability factors by the CBAM are very different from industry to industry, government support should be established along the path of vulnerability. Finally, carbon neutrality is a challenge for SMEs in the short term, but it can be an opportunity if successfully overcome. SMEs should establish response measures to the CBAM from a long-term perspective.

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