Carbon Border Adjustment Mechanism: the good, bad & ugly

Against the backdrop of the European Commission conducting public consultations on the Carbon Border Adjustment Mechanism (CBAM), FIPRA’s latest Intelligence Series webinar brought together a star-studded lineup of speakers sharing views and insights into this measure aiming to prevent carbon leakage and slash greenhouse gas emissions in Europe.

The online event “Carbon Border Adjustment Mechanism: the good, bad & ugly” was moderated by FIPRA Financial Services Advisor Peter Chase who pointed out that while CBAM has many supporters, boosting Europe’s efforts to go climate-neutral by 2050, putting a carbon price on imports of certain goods from outside the EU could create a number of challenges and disruptions in a world already divided by trade wars.

Georg Zachmann, Senior Fellow at Bruegel, argued that the introduction of a classic border tax would have a relatively limited impact on climate goals. 

“There is a risk that a carbon border tax on individual upstream products like steel would lead to different prices for such products inside and outside the EU. If a CBAM is implemented, we would risk losing Europe’s higher value-added sectors such as the car industry that are essentially built on such input materials, The EU should instead move to a system that supports green production technologies that enable industrial decarbonisation in the EU and globally,” he said.

According to Zachmann, to avoid locking in high-carbon pathways, the EU should instead move to a system that supports investments in alternative green technologies which have a higher impact when addressing climate issues.

Addressing the impact on industry, Adolfo Aiello, Director of Energy and Climate at Eurofer, stated: “At least in the short to medium term, the CBAM can be introduced as a complementary measure to existing carbon leakage measures. By doing that, you secure better protection for upstream sectors, while taking into account the competitiveness of the entire value chains in Europe.”

“What the industry will need in order to achieve a revolution in a short timeframe is a policy mix where CBAM and measures meant to avoid carbon leakage preserve the level playing field. You also need energy policies that deliver low-carbon energy, financial support for low carbon technologies and push and pull factors to create lead markets,” Aiello added.

Vicente Hurtado Roa, Head of Unit, DG TAXUD, EU Commission, stressed that it is important to keep in mind that CBAM is mainly an environmental measure designed to push third countries to embrace the same level of ambition as the EU.

“The objective is to ensure an ambitious climate policy around the world by avoiding carbon leakage and ensure that EU industry is able to collectively reach its 2030 targets. CBAM is not the only measure in the European Green Deal aimed at achieving these objectives. The EU is not trying to introduce a measure that is completely isolated from the rest of the system,” he said, adding there is a need for other measures such as new green technologies and carbon contracts for difference.

Madeline Tuninga, Head Unit at DG Trade, said CBAM’s compatibility with WTO regulations would depend on the actual design of the measures when they are proposed.

In relation to export subsidies, a point frequently raised by the audience, she said it would depend, and need to be assessed in the context of the WTO disciplines on subsidies (WTO Agreement on subsidies and countervailing measures)

“Trade contributes at various levels on this topic. In the first place, CBAM needs to be in compliance with the WTO rulebook. Beyond that, both the WTO and FTAs offer opportunities to facilitate trade in climate friendly goods and services also also as a platform to engage with third countries. Ultimately, if we have all comparable levels of ambition to meet climate targets, we would in the end not need border measures,” said Tuninga.

Matthew Snoding, FIPRA Special Advisor on Tax & International Trade, said: “CBAM is an extremely ambitious measure with quite a tight timeline. The Commission needs to constantly evaluate and take input from industry as this measure could have long and far-reaching implications both inside and outside the EU.”

The Commission stressed the importance of an impact assessment — expected to be published by February 2021 — that will provide a basis for a final decision at the political level, assessing issues with supply chains, competitiveness, impacts on the price of goods, as well as simplifying the application process.