European Union: Carbon Border Adjustment Mechanism

by Leonie Schiedek and Amy Wilson 

As part of the European Union’s (EU) Green Deal legislation, a Carbon Border Adjustment Mechanism (CBAM) has been proposed that should work hand-in-hand with the EU Emissions Trade Scheme (ETS) to prevent carbon leakage [1,2]. The CBAM is a border levy that ensures the imported industrial products are subject to the same carbon price as domestic producers [3]. The reporting of the imported products is expected to be launched from as early as 2023, but payments for such products will not start until 2026 [3]. 

The CBAM aims to remove the immediate competitive advantage and create a level playing field between foreign and domestic producers. This is hoped to reduce the risk of carbon leakage and ensure sustainable industries outside of the EU [3]. 

Figure 1: Simplified illustration of CBAM process (Adapted from EY, 2021 The EU – CBAM Carbon Border Adjustment Mechanism (newrealityblog.com))

The EU CBAM from 2026 will cover imports of the following commodities, since they have both high emissions and also a risk of carbon leakage [4]:

  • cement
  • iron and steel
  • aluminium
  • fertilisers
  • electricity

Some individuals suggest the ETS already covers what the CBAM promises; they are very similar in nature and CBAM will mirror aspects of the ETS [5]. For example, it is based on the purchase of certificates by importers and will be based on the weekly price of EU ETS allowances [5]. However, the CBAM differs from the ETS because it is not a “cap and trade” system [4]. Consequently, it may be argued that the CBAM aims to strengthen the existing ETS by resolving the carbon leakages. 

CBAMs have been trialled or are in the planning stage in different regions of the world such as California (adjustment for certain imports of electricity), Canada and Japan [5]. The G20 Finance ministers have called for closer international coordination on carbon pricing mechanisms [5]. However, for now, these mechanisms are often described only as a “last resort” [6].

How efficient could the CBAM be? 

Prior to its introduction in 2020, a border adjustment for European emissions trading had been discussed for at least the proceeding decade. In 2010, Kuik and Hofkes concluded that “from an environmental point of view border tax adjustments would not be a very effective policy measure, but might mainly be justified by considerations of sectoral competitiveness […] Border adjustment measures based on best available technologies would contribute even less to global emissions reductions” [7]. That is mainly because of the moderate effects of carbon leakage in the different sectors. Rather, it would be a financial signal directing industries towards a low-emissions path [7]. A current study suggests that it will be critical to agree on the details: How will the carbon footprints of certain products be calculated? Which sectors will be included? How can the EU comply with the rules of the World Trade Organisation (WTO) [10]?

Current criticism is also coming from Brazil, India, China and South Africa because they have “grave concern” about a potential “unfair discrimination” of their products to Europe [9]. For instance, China’s plastic or South American pulp exports could be among the most affected products [8]. There is also the issue of what products the CBAM would cover in the future; for example, consumer goods have extensive supply chains and therefore tracking their carbon content accurately will be difficult [3]. Denmark mentioned concerns about the impact of the CBAM on the EU’s identity in international politics potentially harming their reputation as “a champion of free trade” [9]. On the other hand, Finland and France defend the CBAM as an “essential component” of the EU Green Deal, fostering EU industries’ competitiveness in the race to zero emissions [9].

Clearly, there is concern about ensuring fair competition and guaranteeing their own competitiveness in the market. However, increasingly ambitious environmental standards might be accepted by some, potentially creating tension with the EU’s trading partners [9]. However, in order not to lose their credibility as climate action leader, the EU needs to stay on track despite the criticism [9]. So how will the topic be discussed in international negotiations? 

CBAM and relevance for COP26

John Kerry had called upon the EU to wait to introduce the CBAM until after the COP26 due to its economic implications [10]. However, as it was already introduced and the issue of emissions trading related to Article 6 of the Paris Agreement will in general most likely be a hot topic in the international climate negotiations at COP26 in Glasgow, the CBAM might stir the pod around market-based approaches and potential resulting trade tensions [11]. Nevertheless, many suggest that during future COPs and discussions surrounding carbon borders and levies, the stick approach will be ineffective because of the COVID-19 pandemic and drawn out climate finance discussions to assist developing countries with the Paris Agreement goals [3]. Consequently, future COPs need to provide a space to discuss carbon borders, the different structures of carbon mechanisms and enhance international relations through rewarding approaches that are not developed based on the idea of forming carbon clubs [3]. 

References:

[1] Kardish, C.; Duan, M.; Tao, Y.; Li, L.; Hellmich, M. (2021). The EU carbon border adjustment mechanism (CBAM) and China: unpacking options on policy design, potential responses, and possible impacts. Berlin: adelphi. URL:  https://www.adelphi.de/de/publikation/eu-carbon-border-adjustment-mechanism-cbam-and-china (last accessed: 27.08.2021).
[2] European Commission (2021). European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions. URL: EU economy and society to meet climate ambitions (europa.eu) (last accessed: 27.08.2021).
[3] Lee, B., Baron, R., (2021), Why the EU’s proposed carbon border must not be used to launch a carbon club, World Economic Forum. URL: https://www.weforum.org/agenda/2021/06/eu-carbon-border-clubs-climate/ (last accessed: 30.08.2021).
[4] European Commission (2021). Carbon Leakage. URL: Carbon leakage | Climate Action (europa.eu) (last accessed: 27.08.2021).
[5] European Commision, (2021), Carbon Border Adjustment Mechanism: Questions and Answers. URL: https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661, (last accessed: 30.08.2021).
[6] TIME (2021). John Kerry on Border Carbon Tax: The U.S. Doesn’t Want to Push Others Away. URL: Kerry Explains Why U.S. Isn’t Doing a Border Carbon Tax—Yet | Time (last accessed: 30.08.2021)
[7] Kuik, O., & Hofkes, M. (2010). Border adjustment for European emissions trading: Competitiveness and carbon leakage. Energy policy, 38(4), 1741-1748.
[8] World Economic Forum (). When two global agendas collide: How the EU’s climate change mechanism could fall afoul of international trade rules. URL: How a new EU climate law could favour some traders over others | World Economic Forum (weforum.org) (last accessed: 27.08.2021).
[9] ECFR (2021). Europe’s green moment: How to meet the climate challenge. URL: Europe’s green moment: How to meet the climate challenge – European Council on Foreign Relations (ecfr.eu) (last accessed: 30.08.2021)
[10] Financial Times (2021). John Kerry warns EU against carbon border tax. URL: John Kerry warns EU against carbon border tax | Financial Times (ft.com) (last accessed: 30.08.2021) 
[11] Environmental Defense Fund (2021). COP 26: Implementing Article 6 of the Paris Agreement. URL: COP 26: Implementing Article 6 of the Paris Agreement | Environmental Defense Fund (edf.org) (last accessed: 30.08.2021)
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