CBAM Part 2: Points of Discussion

by Reinout Debergh

This article follows up on part 1 and introduces important points in the debate around the carbon border adjustment mechanism (CBAM) that is currently taking place.

Emissions

First, CBAM is based on products while the EU ETS is based on processes. However, it can be problematic to allocate emissions to the different goods produced by one installation as admitted by the European Commission (EC) because as the EC said, “there are no rules for going into more detail [1]. 

Secondly, the CBAM proposal only covers a limited number of greenhouse gases (GHG) [2]. Most notable, the highly potent methane is not covered. For example, for imported electricity, methane emissions from power plants are left out despite energy generation accounting for about 20% of global methane emissions [3]. 

Thirdly, the proposal only applies to direct emissions not imported ones [2]. This means that for products that require a lot of electricity, a significant amount of imported emissions will be missed. One example is aluminium, often referred to as ‘solid electricity because of the high amounts of electricity required [4].

Export rebates

During production, transport and sales, companies pay taxes on the goods they export. Export rebates entail the refund of such taxes [5]. Industry wants to have these for “products which are produced in the EU and exported to some countries which do not have the equivalent carbon limitation or pricing policies” [6]. They are concerned that in the absence of both free allocation and export rebates, they will not be able to compete in international markets. However, there are legal challenges to this [7]. Environmental NGO’s are highly critical of this idea as well. Carbon Market Watch said: “Asking for export rebates on top of free allowances and CBAM is like having the cake, eating it, and reaching over for the muffins too”. Experts in the Commission informally admitted that export rebates weren’t possible [6].

LDC’s

There have been arguments to make exemptions for Least Developed Countries (LDC’s) [8]. But the Commission argued they only account for 0.1% of imports of CBAM covered products. They state that exemptions could encourage them to increase emissions and they would then have to dismantle that carbon-intensive industry as any exemptions would be temporary [9]. The need for supporting LDCs is however recognized, but the proposal does not have concrete provisions for this. Specific mention of LDCs in the proposal is limited to the preamble: “the Union should support less developed countries with the necessary technical assistance in order to facilitate their adaptation to the new obligations established by this regulation” [2].

Carbon pricing

Though the EU does not plan to include export rebates into the CBAM mechanism, the CBAM fee can be reduced if a carbon price has been paid in the exporting country [2, 9]. The proposal only recognizes a carbon tax or an emission trading system [10]. This is known as ‘explicit carbon pricing’ [11]. CBAM does not recognize implicit carbon pricing, the carbon cost incurred through regulations [12]. This could lead to tensions with trade partners with no explicit carbon price like the US [13].

Affected countries

Which country will be the most affected depends to some extent on the indicator you look at. The following three graphs look at imports into the EU27 in tonnes and euros and also at export shares. 

Both figures 1 and 2 show Russia as the biggest exporter of CBAM covered goods to the EU among the nine countries. For China this is different. If we look at the amount in tonnes (figure 2), China is only joined 4th with the UK. In monetary value however, China is the 2nd most important country. The three other most important countries are Ukraine, Turkey and the UK. Countries like Japan, South Korea, India and the US are less important exporters. When looking at the type of goods, it is clear that iron and steel are by far the most dominating type. 

Figure 1: imports of CBAM covered goods into the EU in millions of euros [14].

Figure 2: imports of CBAM covered goods into the EU in thousands of tonnes [14]. 

To get a more accurate picture of how much these countries will be impacted, we must compare their imports of CBAM covered goods into the EU to their total exports. This is referred to in figure 3 as their export share of CBAM covered goods. It is clear that Ukraine stands out with a share of over 7% followed by Turkey, Russia and the UK. It is perhaps not a surprise that shares are higher for neighbouring countries whilst those for countries like the US and Japan are very low. 

Figure 3: export share of CBAM covered goods into the EU [14, 15, 16, 17].

Conclusion

CBAM has generated a lot of debate around various contentious issues as shown above. Industry, NGO’s, and third countries are all trying to get the best proposal for them. For the climate, the impact will likely be small given its limited scope [18]. The discussions on their own, however, are already showing a positive impact withCBAM encouraging countries to be more aware and making them ask the right questions. 

References:

[1] Chase, P., Pinkert, R., The EU’s Triangular Dilemma on Climate and Trade, GMF, https://www.gmfus.org/news/eus-triangular-dilemma-climate-and-trade, accessed on 16/10/2021.
[2] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a carbon border adjustment mechanism, European Commission, https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A52021PC0564, accessed on 16/10/2021.
[3] Sources of methane emissions, IEA, https://www.iea.org/data-and-statistics/charts/sources-of-methane-emissions-2, accessed on 16/10/2021.
[4] Hume, N., EU aluminium groups seek exclusion from carbon border tax, Financial Times, https://www.ft.com/content/67b020ea-a82e-423e-a100-6d4df94d77ce, accessed on 16/10/2021. 
[5] Chen, C.-H., Mai, C.-C., Yu, H.-C., 2006, The effect of export tax rebates on export performance: Theory and evidence from China, China Economic Review Volume 17 Issue 2, https://doi.org/10.1016/j.chieco.2005.06.001. 
[6] Kurmayer, N. J., EU industry shuns carbon border levy, calls for export rebates, Euractive, https://www.euractiv.com/section/energy-environment/news/eu-industry-shuns-carbon-border-levy-backs-export-rebates-instead/, accessed on 16/10/2021. 
[7] Rilling, S., ICIS EU Carbon: Carbon Border Adjustment Mechanism – possible implementations and EUA market implications, ICIS, https://www.icis.com/explore/resources/news/2020/12/15/10585694/icis-eu-carbon-carbon-border-adjustment-mechanism-possible-implementations-and-eua-market-implications, accessed on 16/10/2021.
[8]  Lowe, S., The EU’s carbon border adjustment mechanism: How to make it work for developing countries, Centre for European Reform, https://www.cer.eu/publications/archive/policy-brief/2021/eus-carbon-border-adjustment-mechanism-how-make-it-work, accessed on 17/10/2021.
[9] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a carbon border adjustment mechanism, European Commission, https://ec.europa.eu/info/sites/default/files/carbon_border_adjustment_mechanism_0.pdf, accessed on 17/10/2021. 
[10] Marcu et al., The EU Carbon Border Adjustment Mechanism (CBAM) PRELIMINARY ANALYSIS OF THE EUROPEAN COMMISSION PROPOSAL FOR A REGULATION ESTABLISHING A CARBON BORDER ADJUSTMENT MECHANISM, 14 JULY 2021 (COM(2021) 564 FINAL), ERCST, https://ercst.org/wp-content/uploads/2021/07/20210714-CBAM-proposal-preliminary-analysis-v4.pdf, accessed on 17/10/2021. 
[11] Galgóczi, B., The EU’s carbon border adjustment mechanism (CBAM) – what is at stake?, European Trade Union Institute, https://www.etui.org/news/eus-carbon-border-adjustment-mechanism-cbam-what-stake, accessed on 17/10/2021. 
[12] Jarsulic, M., What the European Union’s Proposed Trade Tax on Carbon Means for the United States, Center for American Progress, https://www.americanprogress.org/issues/economy/reports/2021/08/16/502650/european-unions-proposed-trade-tax-carbon-means-united-states/, accessed on 17/10/2021.  
[13] Taylor, K., US raises concerns over Europe’s planned carbon ‘border tax’, Euractive, https://www.euractiv.com/section/energy-environment/news/us-raises-concerns-over-europes-planned-carbon-border-tax/, accessed on 17/10/2021.  
[14] EU trade since 1999 by HS2-4-6 and CN8 (daily updated) (DS-057380), Eurostat, http://epp.eurostat.ec.europa.eu/newxtweb/mainxtnet.do, accessed on 02/09/2021.
[15] US Dollar to Euro Spot Exchange Rates for 2019, Exchange Rates UK, https://www.exchangerates.org.uk/USD-EUR-spot-exchange-rates-history-2019.html, accessed on 02/09/2021. 
[16] Japan Trade Summary 2019 Data, World Integrated Trade Solution, https://wits.worldbank.org/CountryProfile/en/Country/JPN/Year/2019/Summary, accessed on 02/09/2021. 
[17]  Exports of Ukrainian goods increased by 6.4% in 2019, ukrinform, https://www.ukrinform.net/rubric-economy/2868517-exports-of-ukrainian-goods-increased-by-64-in-2019.html, accessed on 02/09/2021. 
[18] EU should consider trade impacts of new climate change mechanism, UNCTAD, https://unctad.org/news/eu-should-consider-trade-impacts-new-climate-change-mechanism, accessed on 18/10/2021.