National Carbon pricing policies may harm the industries of the countries which impose them if manufacturers decide to relocate to avoid payment, so there is no actual global reduction of emissions. For this reason the principle of Carbon Border Adjustment Mechanisms (CBAM), was developed, whereby importers of products or fuels pay the difference between the carbon price paid in the country of production and the carbon price of the importing country. This therefore incentivises decarbonisation measures and carbon pricing in the producing country and protects the importer from unfair competition.
After several years of planning and negotiation the EU has agreed on a Carbon Border Adjustment Mechanism policy to eventually replace the free allowances on carbon payments (ETS) given to its exporters, which may have impeded faster decarbonisation of industries. Although the EU (like the UK) has an Emissions Trading Scheme which covers about 40% of emissions, CBAM can also be applied to a Climate Income policy such as Canada’s and Canada is looking closely at the idea.
Press Release from the European Parliament:
On Tuesday morning, MEPs reached a provisional agreement with Council to set up an EU Carbon Border Adjustment Mechanism to combat climate change and prevent carbon leakage.
According to the deal reached, an EU Carbon Border Adjustment Mechanism (CBAM) will be set up to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods. This will be achieved by obliging companies that import into the EU to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.
The law will incentivise non-EU countries to increase their climate ambition and ensure that EU and global climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.
The new bill will be the first of its kind. It is designed to be in full compliance with World Trade Organisation (WTO) rules. It will apply from 1 October 2023 but with a transition period where the obligations of the importer shall be limited to reporting. To avoid double protection of EU industries, the length of the transition period and the full phase in of the CBAM will be linked to the phasing out of the free allowances under the ETS. This will be negotiated later this week in connection with the revision of the ETS and the results integrated into the CBAM regulation.
The scope of CBAM
CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as proposed by the Commission, and extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as to some downstream products such as screws and bolts and similar articles of iron or steel.
Before the end of the transition periodthe Commission shall assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal to include all goods covered by the ETS by 2030. They shall also assess the methodology for indirect emissions and the possibility to include more downstream products.
The governance of CBAM will be now more centralised, with the Commission in charge of most of the tasks. By the end of 2027, the Commission will do a complete review of CBAM including an assessment of progress made in international negotiations on climate change, as well as the impact on imports from developing countries, in particular the least developed countries (LDCs).
After the deal, rapporteur Mohammed Chahim (S&D, NL), said: “CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry. On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the polluter pays principle to our own industry. A win-win situation.”
This partial deal is dependent on an agreement on the reform of the EU Emissions Trading System. Parliament and Council will have to formally approve the agreement before the new law can come into force. The new law will come into force 20 days after its publication in the EU Official Journal.
Finally, in case you missed the blog in ‘Views’, here is the hopeful message from Citizens Climate InternationaI about COP27 to end the year on a high note, along with the good news from the COP15 Biodiversity summit of course!
The outcome of COP 27 in Sharm El Sheikh treated the consequences – loss & damage, but not the cause – fossil fuels. It was a huge victory to get loss and damage funding. This is to be celebrated.
We cannot rest yet. There is no mention of oil and gas in the COP 27 outcome. The math is simple: more fossil fuels burned means more adaptation and loss and damage costs. This victory is unbalanced. Anything that is unbalanced is doomed.
We have hope because it’s not the COP sessions that change the world, it’s the actual work that goes on after governments have made those promises. We have hope because we have been working behind the scenes and monitoring progress at the G7, G20, the United Nations, the World Bank and the IMF for several years now. We have hope because our volunteers are doing fantastic work around the world. We have hope because we know that the tracks have been laid for a resilient and equitable future and the train is about to leave the station. Consequently, we have hope because we know that the transformation of the economy will not be linear.
Change is coming. Find out how you can help and spread hope.
Wishing you all a Merry Christmas and a Happy New Year!