The European Union will be the first region in the world to impose ‘green tariffs’ on imports, in an effort to bring down global carbon emissions. The policy is called a Carbon Border Adjustment Mechanism – CBAM, and while it puts the EU on track to reach climate goals, other countries have expressed concern about its fairness.
As the global push for climate action progresses, many governments have pledged to reduce their emissions – the EU included. However, cutting emissions without disadvantaging important industries poses a dilemma.
If one government or bloc forces industries to bring down their CO2, companies based in countries without such regulations will be at an advantage.
This can lead to a phenomenon known as ‘carbon leakage’, where businesses are drawn to move their operations to countries with lax emissions rules to benefit from lower prices.
Carbon leakage also defeats the purpose of carbon regulations because it means net levels of CO2 emissions remains the same.
The best solution to avoid carbon leakage is a global carbon tax, but while this option has been under discussion for over a decade, it would seem to require an impossible level of international cooperation.
Many see CBAMs as a viable alternative to allow them to make urgent progress on emissions reduction without compromising the competitiveness of their industries.
How will the EU’s CBAM work?
The CBAM is part of Europe’s Green Deal, which works towards carbon neutrality by 2050.
It will begin to operate from October this year in a simplified form, becoming fully realised from 2026 onwards.
Just like Europe’s existing Emissions Trading System, which has been operating since 2005, CBAM will require importers to buy carbon emissions certificates. These certificates will be required for imports the EU decides are not produced under emissions standards similar to Europe.
Currently, these regulations are enforced on emitters within Europe – CBAM aims to apply an equivalent carbon price to importers. The levy will therefore be tied to the EU’s carbon market price, which is currently around €90/tonne.
The industries currently proposed under CBAM’s scope include iron and steel, cement, fertilisers, aluminium, electricity and hydrogen. By 2026, further scope extensions will be implemented to cover additional products like chemicals and polymers, with a full inclusion of all ETS products planned by 2030.
A lot of the issues with CBAM come from the fact that the EU will choose who will be subject to the tax. According to the provisional agreement, companies in countries that have EU-equivalent domestic carbon pricing regulations will be able to export to Europe without buying CBAM certificates.
Not only does this case-by-case selection open up room for discrimination, but it’s against World Trade Organisation rules.
The WTO has a most-favoured-nation rule which mandates that any advantage given to imports of one member must be extended to the like products of all other members. The CBAM would risk breaking this rule, and may be inconsistent with a few other WTO agreements.
The US has already lodged a complaint with the WTO, and a host of other countries have expressed “grave concern”. Brazil, China, India, South Africa have declared CBAM is protectionism disguised as climate action.
But as the European Parliament’s lead negotiator, Mohammed Chahim stated, “[CBAM] is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry.”
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