When you hear about a carbon tax or emissions trading, you may first wonder whether you will have to pay a tax or buy allowances. Here, we need to start by checking whether our business is directly covered. Chapter 3 of Technology and Solutions for Demonstrating Carbon Reduction then looks at how costs can move through the supply chain. Separating direct obligations from indirect effects is the starting point.
First, let us distinguish the concepts in the book
The effects of carbon pricing can vary depending on the trading relationship. A company that must comply with a direct scheme and a farm that supplies its raw materials do not need to prepare the same information. I recommend listing legal obligations, commercial requests, and management needs separately. If a buyer asks for data, check which standard and period the request refers to. Understanding the purpose first can help avoid buying more equipment than necessary or preparing irrelevant documents.
A carbon tax applies a tax rate to covered emissions and imposes a cost. If a tax rate and adjustment pathway are specified, they may help set price assumptions for investment plans. The actual burden depends on the scope and on exemption or reduction conditions. Setting a tax rate does not guarantee a particular amount of emissions reduction, so other policy measures and actual responses also need to be considered.
An emissions trading system sets a total emissions cap for covered entities and allows allowances to be traded. The price is formed through trading, and actual emissions do not match the cap exactly every year. Whether allowances can be carried over or borrowed, and whether external reductions may be used, also depends on the rules of the scheme.
The central advantage is that the total amount of permitted emissions is managed. Actual reductions, however, depend on how stringent the cap is, which entities are covered, and how measurement and compliance are managed. Economic conditions, fuel prices, and policy changes can alter demand for and prices of allowances. A price decline may weaken incentives to invest in reductions. The types of market-stability measures and the conditions under which they operate should also be checked for each scheme.
Another pathway connected to emissions trading is the use of reductions from eligible external projects. The scheme defines which reductions are recognized and any usage limits. For livestock methane projects, check the applicable methodology, additionality, baseline, monitoring, verification, and safeguards against duplicate issuance or use. Avoided enteric methane emissions and removals that store carbon are different in nature; permanence requirements addressing reversal risk for stored carbon should not be applied to them identically. After feeding stops, the project should not count new reductions as continuing.
There is one fact we should make clear right away: livestock products are not currently goods covered by CBAM. There is no current situation in which Korean beef or feed faces a direct tariff because of CBAM. Many materials blur this point. Such exaggeration may create a sense of urgency in the short term, but it erodes trust in policy.
What to look at in practice
Let us consider a change in the supply cost of electricity or logistics services. How much of that change is reflected in a farm’s purchase costs depends on contracts and competitive conditions. We cannot assume that the existence of a policy means every cost will be passed through at the same rate. We need to look at the actual invoice items and trading terms.
The key point is that the embedded emissions of products are linked to the cost of trade. CBAM reflects a carbon price in the embedded emissions of covered imports, making the measurement, reporting, and verification of relevant emissions data a supply-chain task. The responsible party, covered goods, and timing must be checked against the applicable rules. When discussing implications for food and agriculture, distinguish the current scope from the possibility of future expansion.
Food companies that procure livestock products may need farm-level information when calculating supply-chain emissions. If raw materials are a significant emissions source, improving energy use at the company’s own plants alone may not be enough to meet supply-chain targets. Actual data submissions and reduction requests must be checked against each buyer’s calculation approach and contract.
The compliance market is a market for meeting legal obligations. Companies covered by an emissions trading system submit eligible units corresponding to emissions calculated under that system. Penalties for noncompliance are set by the applicable law. But the existence of a legal obligation alone does not guarantee high liquidity or stable prices.
Questions to ask when reviewing an investment
If a company explains a new policy, check whether it accurately describes the customer’s obligations and the scope of its own service. A service that prepares carbon data and a project that obtains issued credits have different requirements. Knowing many policy names matters less than explaining concretely what preparation the customer needs.
Responding to supply-chain requests. A service may provide information needed for a buyer’s emissions calculations and management of reduction targets. Corporate inventories and credit issuance differ in purpose, boundaries, and eligibility requirements, so neither can be said to have a uniformly lower level of evidence. Whether the information is accepted and what it is worth must be established under the buyer’s calculation standards and contract.
Credit sales and the provision of supply-chain emissions or reduction data have different revenue conditions. The former depends on issuance and delivery of eligible reductions; the latter depends on data accepted by a buyer and a service contract. Overseas company examples in Chapter 13 should not be read as a purchase commitment to Korean farms. To assess the scale and stability of a supply-chain data business, check its target customers, paid contracts, contract terms, renewal and termination conditions, and data production costs. There is a gap to verify between the possibility of demand and the fact of secured recurring revenue.
Questions to keep in mind before closing the book
The response a farm needs depends on the applicable scheme and its contracts. List direct costs, input prices, and data requests from buyers separately. This will help you assess more calmly through which pathways carbon pricing can affect farm management.
About the Author
Bongjun Lee graduated from the Graduate School of Management of Technology (MOT) at Sogang University. He spent seven years at Infitron Co., Ltd. and 20 years at Honeywell, working for a total of 27 years in gas measurement in service engineering, technical sales, and channel management. He is now the founder of AI Safety Korea Co., Ltd., where he is researching livestock methane monitoring and measurement, reporting, and verification (MRV) systems using sensors, AI, and data analytics.