Carbon border adjustment mechanism: assisting European business

In the Commission’s communication to the member states concerning the “European Green Deal” (December 2019), in which among numerous aspects in reaching the “deal”, the carbon border adjustment mechanism, CBAM for selected economic-industrial sectors has been revealed. The EU has increased efforts to make a climate-neutral continent by 2050, which could however be undermined by the lack of adequate progressive policies -both around the world and in the EU member states; both could ultimately lead to carbon leakages risks. EU’s business community suggests some options…

Negative examples could, for example occur if companies transfer production to countries that are less strict about emissions; in this and other circumstances global/European emissions would not be reduced to a required level. Hence, the new European carbon border adjust mechanism, CBAM is aimed at counteracting such risks by putting a carbon price on imports of certain goods from outside the European Union to involve product standards for imported goods.

 

In the aftermath of the pandemic, industries are trying to secure emission leniency within the EU’s Emission Trading Scheme (ETS) requirements; to this end, the oncoming industrial subsidies are set to eliminate distortion of competitiveness. As a result, the CBAM (as a complementary measure to the ETS), may be partly ineffective at leveling the playing field between EU firms that face higher environmental regulations – and aspire to higher environmental standards – than foreign firms. There is a need to consider the role of improved product standards, which is considered in the EU Circular Economy Action Plan and can play as an alternative or complementary to CBAM. Product standards can ensure low-carbon, resource-efficient manufacturing and help to reduce negative environmental impact from production.

The EU has the regulatory know-how to design comprehensive product standards and the economic leverage necessary to set the stage for a new national sustainable economy’s patterns. Whereas the scope of the CBAM is rather limited to carbon-intensive sectors, the scope of product standards in the CEAP should be broad enough to push for a sustainable economy.

Despite its challenges, the CBAM has gained considerable political interest in both the EU and the member states. Consequently, the final outcome for EU’s trade-related climate and wider environmental policy is likely to be a combination of the two measures, requiring dedicated attention to be paid to ensure complementarities and coherence between the two policies.

https://ieep.eu/publications/making-trade-work-for-eu-climate-policy-carbon-border-adjustment-or-product-standards

 

The EU’s ambitious “green deal” package worth about one trillion euros aims to assist the EU member states to reach carbon-neutral position by 2050. The CBAM, as part of the whole project, would be used for selected industrial goods and sectors since already 2021.

 

Other possible solutions

The Carbon Border Adjust Mechanism (CBAM) is, seemingly, a politically optimistic approach to green policy; there are still numerous highly polluting industries in the EU member states, e.g. cement, steel and aluminum, to name a few, which need adjustments. 

However, the CBAM reveals some options: although the carbon pricing exist, the likely success of such a mechanism hinges on two elements. Firstly, establishing an objective methodology on how the border tariff rate will be calculated. This would soften any doubts regarding the CBAM’s viability. European manufacturers pay a carbon price set by EU’s ETS – currently at its lowest level since the mid-2018. Foreign imports are excused from paying this, making their products cheaper; thus, the border tariff rate would make import companies from outside EU pay a carbon price. This should signal to other countries wanting to sell in the EU to “greener” their production processes. 

Secondly, the scheme should also be flexible: i.e. when other countries impose carbon prices as high as those in the EU or demonstrate lower carbon usage (like sourcing their electricity from renewables) imports from those countries would be exempt. This would incentivize non-EU member countries to prove emitted greenhouse gas emissions. 

Reference to: https://www.climatebonds.net/2020/04/eu-carbon-border-adjustment-mechanism-clear-thinking-required-special-policy-post-cbam

 

Pros and cons

While being an important step, the CBAM’s concept has been considered cumbersome and controversial by the business community arguing that the application of adjustment mechanism must be handled with a due care: for example if these measures prove to be protectionist, the CBAM could inflame a “climate trade war”, undermining global decarbonisation efforts.

In the BusinessEurope’s comments on CBAM, the inception of the impact assessment concerning carbon border adjustment (within the EU Green Deal) is regarded as “a sensitive measure”; though BusinessEurope didn’t make a definite position.

European corporate community expects that the EU Emissions Trading System (EU ETS) should remain the key market-based instrument for the European industries and the power sector to cost-effectively reduce their GHG emissions. This includes the system of free allowances that provides the best key stimulus for industry installations under the EU ETS and the adequate compensation of indirect ETS costs.

Replacing the existing carbon leakage measures by an untested mechanism could create considerable uncertainties and risks for the European industry. Therefore, BusinessEurope calls on the European Commission to include at least one scenario in its impact assessment where a CBA mechanism would co-exists with the existing carbon leakage measures.

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism/F525247

 

Another plausible alternative is to be mentioned too: e.g. to be a progressive and competitive industry in the world, the European companies already can (and should in the future) be powered by affordable and renewable energy. One option is the wind energy: the costs of offshore wind have dropped more than 66 percent since 2012. This makes offshore wind a cornerstone to European green energy transition, supplying cheap green electricity and enabling production of renewable hydrogen.

To deliver on the EU’s “green deal”, which is planned to make Europe the world’s first climate neutral continent, renewable power production must become the main source of energy for the member states’ economies. The European Commission has estimated that such transformation will increase electricity demand by about 2-3 times up to 2050 with a corresponding increase in the renewable energy production facilities, i.e. in offshore wind power to about 400- 450 GW offshore capacity installed by 2050 (which represents a 20-fold increase from about 20 GW presently).

Source: “How offshore wind can help to decarbonize Europe” in:

https://orsted.com/en/about-us/whitepapers/a-european-green-deal?utm_source=politico&utm_medium=email&utm_campaign=in_bruxelles&utm_content=start_1.

More in: Read how offshore wind can help deliver a Green Deal for Europe

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