The European Union (EU) has proposed introducing a carbon border adjustment mechanism (CBAM), a form of carbon pricing on imports, as part of the European Green Deal. The rationale behind the initiative is to prevent EU efforts to curb greenhouse gas (GHG) emissions from being undermined by a lack of environmental controls in non-EU countries due to so-called “carbon leakage”. The aim is to prevent stricter climate policies in one jurisdiction from leading to increased GHG emissions in other jurisdictions.
Carbon leakage can occur when industries relocate or lose market share at home or abroad as a result of decreased competitiveness due to rising carbon prices, or because new investments choose to go elsewhere. Currently, imported goods account for approximately 20% of the EU's global GHG, and GHG emissions embedded in imports have been steadily increasing.
EU expectations
At the beginning of 2021, the European Parliament adopted a resolution (P9_TA (2021) 0071), with 444 votes in favour, 70 against and 181 abstentions, outlining preferences for an EU carbon system compatible with the World Trade Organisation (WTO). It is based on the Report on an initiative of the European Parliament's Committee on the Environment, Public Health and Food Safety entitled “Towards a WTO-compatible EU carbon border adjustment mechanism”, adopted on 5 February 2021. The resolution reiterates the need to increase climate protection while preventing carbon leakage and ensuring a level playing field between importers and domestic European producers.
In a post statement Speaking before the vote, Yannick Jadot, Member of the European Parliament (MEP) representing the Greens/European Free Alliance (EFA), highlighted the CBAM as an opportunity to “reconcile climate, industry, jobs, resilience and sovereignty.” He added: “We must stop being naive and impose the same carbon price on products, whether produced inside or outside the EU, to ensure that the most polluting sectors also participate in the fight against climate change and innovate towards zero carbon.”
In the resolution, the MEPs highlight that “trade can be an important tool to promote sustainable development and help combat climate change”, and the EU can act as a benchmark for limited carbon emissions, considering that its consumer market is the second largest in the world.
MEPs also stress that the CBAM must be compatible with WTO rules and free trade agreements (FTAs), and “designed exclusively to promote climate objectives and not be misused as a tool to enhance protectionism, unjustifiable discrimination or restrictions.” Compliance with WTO rules includes equal treatment for importers and domestic producers.
Furthermore, they propose that carbon border adjustment be applied in a similar way to the current EU emissions trading system (ETS) by setting import duties on imports independent of the EU trading regime (EU ETS) , which will be set on the basis of a carbon value that reflects the EU price. Sectoral coverage, they say, should be the same as that of the EU ETS, starting with electricity generation and intensive industries. in energy such as cement, steel, aluminum, oil refineries, paper, glass, chemicals and fertilizer production. According to the text of the resolution, the CBAM should aim to Foreign producers from countries with less stringent climate policies than in the EU.
The resolution is an “own initiative” of the European Parliament, reflecting its clear position and representing a way to influence the European Commission’s upcoming proposal by initiating discussions on possible design elements of the CBAM. The Commission is expected to publish the legislative proposal on the CBAM in the second half of 2021. This will trigger the process of negotiated consent by the European Council, the European Parliament and the Commission. External consultations will also be carried out. As a result, the CBAM would introduce new CO2 emission reduction measures on a transitional basis in 2023 and finalise them by 2026.
Some reactions
While the specific design of this cutting-edge EU climate measure (CBAM) is being developed, the United Nations Conference on Trade and Development (UNCTAD) has expressed its concern.
In a recent report, UNCTAD shows the possible consequences of CBAM on international trade, carbon dioxide (CO2) emissions, the impact on income and employment of countries within and outside the European Union, with special attention to developing and vulnerable countries.
According to the possible scenarios, the report indicates that the CBAM mechanism would imply for Argentina a loss of revenue of between 141,04 and 75,49 million dollars. It would also lead to an increase of 0,44% to a decrease of 2,35% in its exports of energy-intensive products.
The report states that while While the CBAM would be effective in reducing carbon leakage, its value in mitigating climate change is limited, as the mechanism would reduce only 0.1% of global CO2 emissions. On the other hand, as it is a mechanism that seeks to prevent the leakage of CO2 production and emissions to the EU's trading partners with less stringent emissions targets, it is not yet clear how it can support decarbonisation in developing countries.
"Effectively reducing these emissions will require more efficient production and transportation processes," the report says.
The report says that several of the EU's trading partners exporting goods in carbon-intensive sectors have expressed concerns that the CBAM would substantially reduce their exports.
Sales of the developing countries In carbon-intensive sectors, the effects would be reduced by 1.4% if CBAM is implemented with a price of $44 per tonne of embodied CO2 emissions, and by 2.4% if it is implemented with a price of $88 per tonne, according to the report. It clarifies that these effects will vary significantly from one country to another, depending on their export structure and the intensity of carbon production.
However, the developed countries, as a group, would not suffer export declines in either scenario, as many tend to employ production methods that are less carbon-intensive than many developing countries.
Under a CBAM based on a carbon price of $44 per tonne, developed countries' revenues would rise by $2.500 billion, while developing countries' revenues would fall by $5.900 billion, according to UNCTAD's analysis.
However, developed countries would experience a larger welfare loss of $51.000 billion from the initial introduction of a $44 per tonne carbon price, driven by losses in the EU, while developing countries would gain $1.000 billion from the absence of the CBAM.
The effects on employment and wages They are small in the vast majority of economies, well below 0,1 percent.
Regarding the consequences for the EU economyThe report finds that higher carbon prices would significantly reduce carbon emissions in the EU, but exports from the world's largest trading bloc would decline.
A CBAM based on a carbon price of $44 per tonne of captured CO2 emissions would cut carbon leakage from climate policies in the EU by more than half, from 13,3% to 5,2%. But the mechanism would not fully offset the negative effects of the carbon tax on the EU economy.
“The impact on climate change mitigation is limited,” the report said.
In particular, UNCTAD Acting Secretary-General Isabelle Durant noted that "the EU could consider using part of the revenue generated by the CBAM to accelerate the diffusion and adoption of cleaner production technologies in developing countries«.
"This will be beneficial in making the economy more sustainable and fostering a more inclusive trading system," he said.
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