Carbon Leakage

Carbon leakage refers to the situation where, due to stringent climate policies in one country, businesses transfer production to other countries with laxer emissions constraints. This can lead to an increase in total global greenhouse gas emissions if production moves to less carbon-efficient regions. It undermines the environmental objectives of the initial policy. The European Union's Carbon Border Adjustment Mechanism (CBAM), established by Regulation (EU) 2023/956, is a key policy tool designed to mitigate this risk. Within the ISO 31000 risk management framework, carbon leakage is classified as a policy and legal transition risk, requiring enterprises to integrate it into their strategic planning and supply chain risk assessments.

In ERM, addressing carbon leakage risk involves a multi-faceted approach. Key steps include: 1) Supply Chain Carbon Mapping: Conduct a thorough assessment of Scope 3 emissions according to the GHG Protocol to identify suppliers in high-risk jurisdictions without robust carbon pricing. 2) Financial Impact Analysis: For businesses exporting to the EU, quantify potential costs under CBAM by calculating the embedded emissions in products like steel and aluminum. This allows for accurate financial forecasting. 3) Risk Mitigation Strategy: Develop strategies such as diversifying the supplier base, investing in low-carbon technologies, or implementing an internal carbon price. For example, a Taiwanese electronics firm might shift its sourcing of aluminum components from a high-carbon supplier to a low-carbon one, reducing its CBAM liability and enhancing supply chain resilience.

Taiwanese enterprises face several key challenges. First, a lack of data transparency in the supply chain, making it difficult to accurately calculate Scope 3 emissions and product carbon footprints. Second, the complexity and dynamic nature of international regulations like CBAM require significant resources to monitor and interpret. Third, the high capital investment needed for decarbonization poses a significant barrier, especially for small and medium-sized enterprises (SMEs). To overcome these, companies should adopt digital carbon accounting platforms, engage external experts for regulatory guidance, and leverage government subsidies for green technology. The priority action is to establish a cross-functional task force to conduct an initial supply chain carbon risk assessment.

Winners Consulting specializes in carbon leakage for Taiwan enterprises, delivering compliant management systems within 90 days. Free consultation: https://winners.com.tw/contact