COP26: The mechanics of climate change mitigation

The EU’s new Carbon Border Adjustment Mechanism will assist in greening industrial processes and help the world become less carbon intensive, explains Gerassimos Thomas.
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By Gerassimos Thomas

Gerassimos Thomas is Director General for Taxation and Customs Union at the European Commission

04 Nov 2021

We don’t need to look very far these days to find evidence of the effect that climate change is having on our planet. Forest fires have already burned over 640,000 hectares of land in the EU alone this year. This summer, hundreds of lives and thousands of homes were lost in devastating floods in Europe. It is abundantly clear that hiding our head in the sands when it comes to this issue is no longer an option. 

Yet climate change is a global problem. The EU can demonstrate all the ambition in the world, but we also need our international partners to make similar efforts - which is the fundamental idea behind the European Commission’s Carbon Border Adjustment Mechanism (CBAM).

“Third-country producers will have to pay the same carbon prices already being paid by EU companies and will not be treated less favourably than our own”

Proposed in July, alongside the Commission’s wider holistic package to deliver a climate neutral continent by 2050, it will encourage greener industrial practices and more environmentally friendly policies throughout the world. CBAM is fully consistent with, and complementary to, all the other proposals presented eralier this year, spanning reforms in emissions trading, energy, land use and taxation.

CBAM will incentivise third-country producers to adopt carbon-friendly production processes to fight climate change. It will be based on the real emissions of each third-country producer. The price paid at the border will reflect any reduction in embedded emissions and carbon prices already paid in the country of origin, thus rewarding the efforts of the producer concerned to reduce its carbon footprint. 

CBAM will initially apply to a limited number of products – cement, iron, steel, aluminium, fertilisers and electricity - which are collectively responsible for 45 percent of CO2 emissions of sectors at risk of carbon leakage. It will not enter into force immediately; during a three-year transitional period, starting in 2023, importers will only have to report emissions embedded in their goods, with no obligation to pay a financial adjustment.

We will review the mechanism in 2025, working with all stakeholders - including industry - to iron out any wrinkles, before it takes full effect as of 2026 for the products concerned. We must make sure that the EU’s efforts to reduce emissions do not inadvertently lead to carbon leakage – i.e., that they are not undermined by polluting industrial activity being moved elsewhere, or from EU production being replaced by more carbon-intensive imports.

We have gone to great lengths to design our CBAM in such a way that it fully respects international trade rules. It will be applied in an even-handed manner, without any arbitrary discrimination for third-country producers or unjustified restriction to trade. Third-country producers will have to pay the same carbon prices already being paid by EU companies and will not be treated less favourably than our own.

Higher carbon prices are now a reality that we must accept, and it is imperative that European industry gets behind the goal of climate neutrality. While businesses do need to adjust, the picture is not so daunting. EU greenhouse gas emissions fell by 24 percent between 1990 and 2019, while the economy grew by around 60 percent over the same period. EU industry is already at the forefront of green innovation, with the private sector reducing its emissions faster than expected in recent years.

“As November’s COP26 looms, swift and decisive EU action in this area can play an influential and inspirational role in the promotion of climate change mitigation measures around the globe”

The combination of CBAM with the extension and reform of the Emissions Trading System (ETS) will be key. To allow us to reach our commitments, free allocation under the ETS will be gradually phased out independently of a CBAM. However, we are not leaving business to cope through their own efforts alone. The Innovation Fund will offer financing for new investments by industry in low emission technologies, assisting this transition. And, through Europe’s Recovery and Resilience Facility, we are securing unprecedented green investment in Member States, which will benefit all EU businesses. 

As co-legislator, the European Parliament will be instrumental in getting the CBAM across the line, as well as in ensuring its implementation. We have already had constructive exchanges on the various aspects of interest for the political groups, such as the CBAM’s interaction with the ETS, the phasing out of free allocation, the mechanism’s compatibility with international trade rules as well as its final design.

We’re offering every assistance to both co-legislators, so that a transitional phase of the CBAM can come into effect as of 2023. As the international conversation around carbon pricing gathers pace at the G7, the G20 and the OECD, and as November’s COP26 Climate Change Conference in Glasgow looms, swift and decisive EU action in this area can play an influential and inspirational role in the promotion of climate change mitigation measures around the globe. 

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Energy & Climate
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