The Technology Case for Carbon Border Adjustments
A technological approach ensuring that carbon emissions are accurately tracked, reported, and managed
Welcome to the World of the Carbon Border Adjustments
A new report by the CATO Institute Are Carbon Border Adjustments a Dream Climate Policy or Protectionist Nightmare? draw my attention to the policymakers’ efforts for combating greenhouse gas emissions and addressing climate change. Therefore I decided to dig a bit deeper and identify the intersection point of the technology with the regulation and to create workable models for transparent and efficient digitalisation of the policymaker’s work.
The general integration example and the imaginary scenario below are not inspired by a particular client project but by my constant desire to optimise and simplify complex processes and ecosystems. This work is not intended for a specific territory or carbon market. Still, it can be widely interpreted and (I will be proud) used within the OECD countries but primarily in the European Union where the regulation is ready.
The global community has been working to address climate change for decades, with efforts formally beginning in 1992 when the United Nations Framework Convention on Climate Change was established. The UNFCCC called for scientific research and outlined a process to “prevent dangerous anthropogenic interference with the climate system.” This was followed by the Kyoto Protocol in 1997, which set legally binding obligations for developed countries to reduce greenhouse gas emissions. The Paris Agreement in 2015 built on the Kyoto Protocol, requiring all countries to set emissions-reduction pledges with the goal of keeping the global average temperature increase below 2°C above pre-industrial levels. This is not new; it is the A and B over climate change policies..
As global supply chains have become more integrated, emissions from production in one country can have global impacts. In recognition of this, policymakers are considering interventionist trade policies to combat climate change. One of the more recent proposals is the so-called carbon border adjustment mechanism (CBAM), which would impose a tax on the carbon emissions of imported products to provide “equal treatment” to domestic products subject to a national carbon tax. Easy on paper, however pretty complex for implementation.
What Is a CBAM?
A true CBAM is a carbon tax on imports that matches the carbon tax levied on domestically produced goods. It includes a rebate for exports to countries with carbon pricing schemes to avoid double taxation. The idea is to equalise the tax burden between domestic and foreign goods, thereby reducing the incentive for carbon leakage — where companies relocate production to countries with fewer emissions regulations, or where less regulated foreign producers gain a competitive advantage.
A true CBAM is a carbon tax on imports that is equal to the carbon tax a country levies on its domestically produced goods.
The European Union (EU) began phasing in its CBAM in October 2023. Several U.S. lawmakers have proposed legislation to impose border adjustments and carbon tariffs, but these measures have yet to become law. However, the EU’s CBAM and the US proposals differ from a true CBAM in several respects and may not comply with World Trade Organization (WTO) rules.
Challenges and Concerns
There are several reasons to doubt that a CBAM would effectively reduce emissions to mitigate climate change. These policies are likely to create uneven distributional effects on consumers and multiple pathways for rent-seeking cronyism, and protectionism. Additionally, implementing a CBAM poses significant challenges, including:
- Verification of Carbon Emissions: Accurately tracking and verifying the carbon emissions of products across global supply chains.
- Data Transparency: Ensuring transparent and tamper-proof reporting of emissions data.
- Interoperability: Harmonizing standards and data reporting across different jurisdictions and industries.
- Compliance and Enforcement: Ensuring that companies comply with CBAM regulations and that data can be audited efficiently.
Pure libertarians insist that instead of imposing more taxes on trade, policymakers should pursue freer trade, which could provide opportunities to tackle excessive greenhouse gas emissions. Researchers state that centuries of evidence have established that trade spurs economic growth, contributing to cleaner environments. Therefore, the best path toward a cleaner and healthier world is to engage in freer trade and avoid enriching special interests through protectionism. I would, however, leave such a discussion to policymakers and the protagonists of the regulation. My work is to display how the technology could help, improve transparency, establish interoperability and make of CBAM a more or less ‘good regulation’. Technology is the key to making this regulation work the way it is meant to work.
The Technological Framework
To address the challenges associated with CBAMs and enhance their effectiveness, advanced technologies can be leveraged. I asked INDUSTRIA (the company I am managing) to provide a comprehensive technology stack to support CBAM implementation. This stack includes:
Industrial Internet of Things (IIoT)
Role — IIoT devices play a crucial role in monitoring and capturing real-time data on carbon emissions throughout the supply chain. INDUSTRIA is a consulting and development firm for automation and industrial Internet of things applications.
Implementation — Sensors and monitoring equipment installed at various stages of production can feed data directly into a blockchain system.
Benefits — Provides accurate, real-time data; Reduces manual reporting errors; Enhances transparency.
Big Data Analytics
Role — Big Data Analytics is essential for the processing and analyzing the massive amounts of data generated by IIoT devices and other sources.
Implementation — Utilise big data platforms and tools like Apache Hadoop, Spark, or proprietary solutions to process and analyse data.
Benefits — Identifies patterns; Predicts future emissions; Ensures that all reported data is within acceptable thresholds.
Artificial Intelligence (AI) and Machine Learning (ML)
Role — AI and ML can be used for predictive analytics, anomaly detection, and optimization of carbon emissions reporting and reduction strategies.
Implementation — Develop ML models that can predict potential non-compliance suggest ways to reduce emissions and optimise supply chain operations.
Benefits — Enhances the accuracy and reliability of emissions data; Enables proactive measures to reduce carbon footprints; Improves decision-making.
Blockchain and Distributed Ledger Technology (DLT)
Role — Blockchain technology ensures secure, immutable, and transparent recording of carbon emissions data. INDUSTRIA is providing blockchain solutions.
Implementation — Use platforms like Corda to create a decentralised ledger that records all emissions data and related transactions.
Benefits — Provides a tamper-proof record; Enhances trust among stakeholders; Simplifies audit and compliance processes.
Programmatic Contracts
Role — Programmatic contracts automate the enforcement of CBA regulations and tariff calculations.
Implementation — Develop and deploy programmatic contracts on various platforms (including blockchain) to automatically apply tariffs, verify compliance, and manage exceptions.
Benefits — Reduces administrative overhead; Ensures consistent application of rules; Enhances transparency.
Cloud Computing
Role — Cloud computing provides scalable infrastructure to handle data storage, processing, and analysis.
Implementation — Utilise cloud platforms like AWS, Azure, or Google Cloud to host applications, databases, and analytics tools.
Benefits — Offers scalability and flexibility; Ensures cost-effectiveness; Handles large volumes of data and complex processing needs.
Edge Computing
Role — Edge computing processes data closer to the source to reduce latency and bandwidth usage.
Implementation — Deploy edge devices to preprocess data from IIoT sensors before sending it to the cloud or blockchain.
Benefits — Improves response times; Reduces data transmission costs; Enhances real-time decision-making capabilities.
Process Orchestration
Role — Process orchestration coordinates and automates the various processes involved in capturing, recording, and reporting carbon emissions. INDUSTRIA is designing and implementing process orchestration solutions.
Implementation — Use orchestration platforms like Camunda to automate workflows, integrate different systems, and ensure smooth data flow between different components.
Benefits — Increases efficiency; Reduces manual intervention; Ensures alignment with regulatory requirements.
APIs and Integration Layers
Role — APIs and integration layers facilitate seamless integration between different systems and technologies.
Implementation — Develop APIs and integration layers to connect IIoT devices, blockchain platforms, big data analytics tools, and other components.
Benefits — Ensures interoperability; Simplifies data exchange; Enhances overall functionality of the system.
For better understanding and clarity I imagined a general integration example and an example scenario of how modern technology can solve the needs of the Carbon Border Adjustments.
General Integration Example with a Step-by-Step Integration
- Data Capture with IIoT: Sensors installed in factories and along the supply chain capture real-time emissions data.
- Data Preprocessing with Edge Computing: Edge devices preprocess the data to filter and summarize it before transmission.
- Data Storage and Processing in the Cloud: The preprocessed data is sent to cloud platforms where it is stored and further analyzed using big data tools.
- Blockchain for Data Integrity: Key emissions data points are recorded on a Corda blockchain to ensure immutability and transparency.
- AI/ML for Predictive Analytics: Machine learning models analyze the data to predict potential compliance issues and suggest optimization measures.
- Programmatic Contracts for Automated Compliance: Programmatic contracts (if possible on the blockchain) automatically enforce CBA rules, applying tariffs and managing compliance.
- Process Orchestration for Efficiency: Orchestration tools automate the workflows, ensuring that data flows seamlessly between sensors, edge devices, cloud systems, and the blockchain.
- APIs for Integration: APIs connect various components, allowing for smooth data exchange and integration with existing enterprise systems.
Example Scenario: Car Manufacturer Importing Steel
Scenario Overview: Consider a car manufacturer that sources steel from multiple countries for use in its production processes. The carbon emissions associated with steel production can vary significantly depending on the manufacturing practices and energy sources used in different countries. To ensure compliance with carbon border adjustment (CBA) regulations, the manufacturer needs to accurately report and verify the carbon footprint of the imported steel.
Detailed Workflow:
- Emissions Tracking and Logging — Each steel producer uses Industrial Internet of Things (IIoT) devices, such as sensors and monitoring equipment, to track emissions at various stages of production. This data includes CO2 emissions from raw material extraction, processing, and transportation. The emissions data is preprocessed using edge computing devices to filter out noise and ensure data quality before being transmitted to the cloud.
- Blockchain Integration — The processed emissions data is recorded on the Corda blockchain. Each data entry includes details such as the amount of CO2 emitted, the production batch, and the timestamp. This creates an immutable and transparent record that is securely shared among stakeholders. The blockchain ensures that the data is tamper-proof, providing a reliable source of truth for all parties involved.
- Customs and Compliance — When the steel shipments arrive at the border, customs officials access the blockchain to retrieve the emissions data for the specific batches of steel being imported. Programmatic contracts automatically verify the emissions data against the regulatory thresholds. If the data is compliant, the appropriate carbon tariff is calculated and applied.
- Tariff Application — The carbon tariff is automatically added to the import duties using programmatic contracts, ensuring consistent and fair application of the CBA rules. The manufacturer receives a detailed breakdown of the tariff applied, including the carbon emissions data and how the tariff was calculated.
- Transparency and Accountability — The transparent nature of the blockchain allows car manufacturer, steel producers, and regulatory bodies to access and review the emissions data at any time. Any discrepancies or potential compliance issues can be quickly identified and addressed, fostering trust and accountability throughout the supply chain.
A Robust System for CBAs
The above-listed examples are very conceptual but should prove that by leveraging a comprehensive technology stack we can build a robust system for implementing carbon border adjustments.
Proper ROI and TCO studies should be conducted, but modern technologies prove to address the key challenges of data verification, transparency, interoperability, and compliance, making CBAs a more effective tool in the fight against climate change.
Integrating these technologies into CBAs not only enhances their efficiency but also bolsters trust and reliability in the system, paving the way for more sustainable global trade practices.
This technological approach ensures that carbon emissions are accurately tracked, reported, and managed across global supply chains, promoting accountability and encouraging companies to adopt greener practices.
As industries and governments continue to work towards reducing carbon footprints, the integration of advanced technologies will play an essential role in achieving these environmental goals and fostering a more sustainable future.
As always, your feedback is more than welcome. Feel free to share your opinion, do you think that the technology will make CBA ‘a good regulation’?
