Carbon Border Adjustment Mechanism (CBAM): an effective climate measure
On the 14th of July 2021, the European Commission published the legislative proposal to set up a Carbon Border Adjustment Mechanism (CBAM) as part of the “Fit for 55” climate package. As the Parliament`s rapporteur on this key legislation, I welcome the proposal of the European Commission. However, there is room for improvements. The draft report suggests amendments on different aspects of the proposal, ranging from the climate ambition to the trade perspective of the proposal.
First and foremost, it cannot be stressed enough that the CBAM is primarily a climate measure. The general objective is to reduce global greenhouse gas emissions. We achieve this by avoiding carbon leakage. I do not want businesses to relocate and emit elsewhere instead of decarbonising their production in the EU. This makes the CBAM a carbon leakage measure and thus a clear alternative to the current carbon leakage measures in place: namely free allocation of allowances and indirect cost compensation.
It is clear that a full CBAM cannot exist simultaneously with these measures. The Commission suggests a ten-year phase-in of CBAM and phase-out of free allowances.
I suggest doing it faster. We need the CBAM to entry into force as quickly as feasible since it is a better alternative to free allowances, where the polluter pays principle is respected.
In a way, we can state that the positive impact of CBAM on the climate is twofold: it avoids carbon leakage, and it can replace the allocation of free allowances. As a social democrat, I want our climate measure to be feasible and stimulating for our industry. A 5-year phase-in period after a transition period of two years will provide our industry with a clear and realistic pathway. In the end, we know that we need to stimulate decarbonisation if we want to maintain green and sustainable jobs. It is a fact that an excessive allocation of free allocation has undermined our climate policies in the past.1
Another key modification in my draft report is the broadening of the sectoral scope. I suggest to add the chemical sector, including polymers and hydrogen, because it is both carbon and trade intensive. Including this sector means that the coverage of industrial emissions will increase by more than 10%.
Additionally, it would be a wrong signal not to include this sector. Ultimately, the CBAM must mirror European Emission Trade System (ETS) as closely as possible; covering the EU ETS sectors in CBAM must thus be an objective in itself. Including the chemical sector from the beginning will provide the sector with the clarity they deserve. Technical difficulties will be are surmountable, the transition phase can be used for this.
Even though the CBAM is a climate measure in itself, we cannot look away from the obvious trade perspective of this legislation. It is of key importance to seek cooperation rather than confrontation with our trade partners, while at the same time remaining clear and strict about the objective of the CBAM. In order to achieve this, we need to be transparent about the fact that only trading partners with explicit carbon pricing policies in place, can be exempt from CBAM. Comparing regulatory measures to pricing measure is like comparing apples to oranges. It is complex and raises the question how we should incorporate regulatory measures in the EU in that case, which have been in place for years.
A climate club is a valuable instrument. We need this international commitment to climate goals to foster cooperation and solidarity. Let this – however – exist next to CBAM. We cannot be selective whit our climate policies. We cannot exempt trade partners because of the traded value.
The strength of the CBAM lies in a correct and WTO-compatible implementation that does not discriminate or favours any trading partner.
In the end we are levelling the playing field between EU industries and trading partners outside Europe, there is no room for exemptions. Even for Least-Developed Countries (LDC’s), we should not favour exemptions. This would send off the wrong signal and could cause undesirable effects. Instead, we should make the required funds available to help decarbonise industry in LDC’s. The effects of this will be felt in the amount of CBAM certificates they have to submit.
The objective is clear: the sooner trading partners install their own carbon pricing schemes, the better. This way we can make carbon border pricing redundant in due time, and until then let CBAM be an effective climate measure.
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