In December 2019, the European Commission adopted a Communication setting out an ambitious “European Green Deal”. One of the key policies needed to achieve the Green Deal is the proposal for a Carbon Border Adjustment Mechanism (CBAM).
In its Communication, the European Commission acknowledged that the EU’s efforts to become a climate-neutral continent by 2050 could be undermined by the lack of ambitious rules and environmental standards of the EU’s international partners. One concrete risk represented by the EU setting high internal environmental standards is the risk of “carbon leakage”. Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with more lax emission constraints.
With this regard, the European Commission has proposed the creation of a CBAM that would counteract the risk of carbon leakage by putting a carbon price on imports of certain goods from outside the EU. While debates are still ongoing within the European Parliament and the European Commission is set to officially table its proposal for a directive by the second quarter of 2021, the concrete structure and implementation of the CBAM remain unclear.
At this stage, there are three possible different options for implementing a CBAM. These are:
The CBAM as a carbon border tax on imports
This first option, which proved to be the preferred one among respondents to the Commission’s consultation on CBAM, would foresee the application of a tax that would reflect the number of carbon emissions attributed to goods imported into the European market. In other words, if the country exporting the goods within the EU market has lower “carbon standards”, a tax on the goods would be applied. As a consequence, producers in countries with carbon-pricing mechanisms that the EU agrees are compatible with its own may be exempted by the tax. If this option is picked by the European Commission, a decision on taxed would require unanimity in the European Council.
The CBAM as a custom duty on imports
This second option would be applied at the border on a selection of carbon-intensive products imported within the European market. This option could be tricky as it would require the renegotiation of existing tariff arrangements under WTO trade rules or bilateral trade agreements.
The CBAM as an extension of the EU European Trading Scheme (ETS) to imports
In this last case, importers would have to buy allowances to cover their emissions or pay a levy based on the market price of allowances. In this case, “only” a qualified majority vote would be required within the European Council to adopt the measure.
The CBAM has already raised several concerns and criticisms, coming from international companies, industries, and States (ex. Russia) about the impact and the feasibility of such an instrument.
Russia, which would be highly impacted by the mechanism, has declared that the CBAM is incompatible with WTO rules. However, the European Commission has already replied to these criticisms stating that the CBAM could be covered by exceptions to international trade rules defined under Art. XX of the WTO’s General Agreement on Tariffs and Trade (GATT) which states that “exceptions could apply if a measure is necessary to protect human, animal or plant life or health”.
On the impact on industries
The European Commission declared that steel, cement, electricity could be the first sectors subjected to a CBAM, followed by aluminium, fertilisers, and chemicals. Generally speaking, the aviation and the manufacturing sectors might be the most affected by these measures. Some industries complain that they might stop producing their goods because the costs of importing materials would become too high to bear. From the consultation published by the European Commission, we can already see that “stakeholders remain positive towards the border adjustment, but worried about the impact on the current domestic measures to address carbon leakage and the functioning of the functioning of the EU ETS at large”.
The major decisions about the structure and the details of the CBAM will be decided during the upcoming months. The European Commission already declared that they expect the CBAM to be fully implemented by 2023.
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