As a global first, the European Union is planning to introduce a Carbon Border Adjustment Mechanism (CBAM), a new tool to help reach its 2050 climate neutrality targets.
Last week the European Parliament’s Environment, Public Health and Food Safety (ENVI) Committee met with the European Commission’s Director General for Taxation and Customs Union (TAXUD), Gerassimos Thomas, for a first in-depth discussion about how this instrument is supposed to work.
As emission reductions within the EU are expected to be largely achieved through a revision of the Union’s Emission Trading System (ETS), the danger of ‘carbon leakage’ - the shifting of greenhouse gas emitting industries outside the EU to avoid tighter standards - has to be addressed:
CBAM is, in effect, a carbon levy on imported goods that do not meet the EU’s clean and climate friendly production standards. But, as Thomas stressed, the mechanism is a strictly targeted one.
“As ambitions move up and domestic measures become tighter, carbon leakage becomes a bigger problem. The EU can have all the ambition in the world but without matching efforts from our partners it will be no more than a Sisyphean (endless) task”, explained Thomas.
According to the Commission’s proposals, the CBAM will initially affect five industrial sectors, namely cement, iron and steel, fertilisers, aluminium and electricity.
“As ambitions move up and domestic measures become tighter, carbon leakage becomes a bigger problem. The EU can have all the ambition in the world but without matching efforts from our partners it will be no more than a Sisyphean (endless) task” European Commission Director General for Taxation and Customs Union (TAXUD), Gerassimos Thomas
Out of the 63 sectors identified by the EU as potentially being at risk of carbon leakage, the initial five are both the most important as well as the easiest to calculate their carbon footprints, Thomas told the Committee, adding that an expansion of sectors was planned, if and when, feasible to do so without creating trade tensions.
Observers have pointed out, ever since the idea of a CBAM was floated, that an EU Carbon tariff could cause friction with the Union’s trading partners as well as with the WTO, if the mechanism is seen as discriminatory or lacking transparency.
MEPs called for the introduction of a CBAM in an own-initiative report adopted in March this year, and ENVI Chair Pascal Canfin (Renew, FR) opened the committee’s Q & A session with Thomas, saying, “We are all very passionate about this issue”.
Speaking for the EPP, their ENVI coordinator Peter Liese stressed his group’s concern that competitiveness and jobs must be kept in close view while rightly striving for climate neutrality, saying, “The goal must be to decarbonise Europe, to decarbonise the world, but not to deindustrialise Europe”.
Pointing to the possible unintended side effects on international trade, the Liese suggested the possibility of limiting the scope of the initial CBAM, “because when we cover cement or electricity, for example, we will not have to fight the whole world, only our direct neighbours, while other products will include a fight with the whole world.”
Worries about possible negative impacts on European’s industrial prowess were also expressed by the ECR Group’s Anna Zalewska. Thomas replied that the CBAM was specifically designed to avoid carbon leakage, including that resulting from a possible move of production outside the EU by companies trying to avoid the ETS.
“The goal must be to decarbonise Europe, to decarbonise the world, but not to deindustrialise Europe” Peter Liese MEP (EPP, DE)
The Committee’s S&D Group took the opposite view, with Dutch deputy Mohammed Chahim, arguing that, “we should not, already at this stage, start limiting the scope or the possibilities we have around CBAM because, I believe other regions will follow with similar legislation.”
Indeed, US lawmakers are looking at potentially mimicking CBAM through the creation of a Carbon Polluter Import Fee.
A recent study by the climate change think E3G, tellingly titled “A storm in a teacup”, found that while Russia would be hit hardest by a CBAM - and the USA, as well as China hardly at all - overall the instrument would only affect just under 20 percent of imports, due to its limited sectoral scope.
However, despite this, “introducing the CBAM could allow the EU to phase out the free allocation of 265 million emission permits under its carbon market, worth €15.9bn, every year”, according to the report.
Switching his hat from ENVI chair to Renew Europe Group representative, Canfin raised the issue of complex products not yet covered by the CBAM, most notably car manufacturers, who could circumvent the CBAM on steel by producing their cars outside the EU and importing them with an unfair advantage over those using domestic production sites.
Canfin also pointed to the potential difficulties arising for EU companies that rely heavily on exports. These companies could be at a disadvantage compared to non-EU competitors in having to pay the CBAM for imported source products, admitting that a mitigating rebate for exports would probably be incompatible with WTO rules.
On complex products, Thomas underlined the need for a verifiable calculation of their complete carbon footprint for which there was not yet sufficient data available. On export rebates, he acknowledged the problem and the need for further debate, saying that, in the medium term, the problem would diminish as industries became more sustainable.
“We should not, already at this stage, start limiting the scope or the possibilities we have around CBAM because, I believe other regions will follow with similar legislation” Mohammed Chahim MEP (S&D, NL)
While generally welcoming the proposal as a means to improve carbon taxation, Greens/EFA group MEP Sara Matthieu criticised the CBAM instrument for failing to “live up to its high expectations”.
She added, “After fifteen years of free [ETS] allowances, we’re giving manufacturers fifteen more years to adapt. To me that’s simply mind-bending, that’s much too slow.” The Belgian deputy also brought up the issue of solidarity with “our trading partners, particularly the world’s poorest and most climate vulnerable ones”.
In his response, Thomas argued that in the sectors chosen for the CBAM, the trading partners were clearly identified and that they were partners “with whom we can engage”. He added that the trade flows affected by CBAM from lower income countries were very limited, and that complementary instruments to help those countries were available.
The only fundamental criticism of the Commission’s proposals came from ECR vice-chair Herrmann Tertsch, who called the CBAM an attempt at “self-mutilation by climate ideology”.
Thomas responded that there was no hint of ideology in the mechanism only the desire to help fulfil the EU’s Climate Law.
The next step for MEPs and for the ENVI committee is to appoint rapporteurs and shadow rapporteurs for the CBAM legislation.