carbon border adjustment in the EU

EU Climate policy goes global: Introducing a Carbon Border Adjustment  

14 October 2020

Executive Summary

 

  • A CBAM is a game-changer for global climate policy. The need for financing the pandemic recovery package has jump-started the process of introducing an EU Carbon Border Adjustment Mechanism (CBAM). In 2021, the European Commission plans to propose a bill for an EU CBAM, with a view to introduce it at the beginning of 2023. This is likely to be a game-changer for global climate policy. With a CBAM, the EU climate policy goes global – and as regulatory superpower, home to the biggest market worldwide, the EU stands a good chance to find some followers.
  • A CBAM is a superior instrument to avoid carbon leakage. Today, carbon leakage is addressed by a system of free allocation of emissions certificates: The 4th period carbon leakage list includes over 50 sectors receiving free allocations that totaled to 37% of ETS emissions in 2015 – i.e. more than one third of relevant emissions is not priced. With a CBAM, all CO2 emissions – including those embedded in imports – can be priced according to the certificate prices in the EU-ETS.
  • A CBAM creates huge costs for sectors, especially for cement, iron and steel and petroleum products. With the end of the free allocation of certificates, many industries will face significantly higher carbon costs. To identify the sectors heading for a CBAM reality check, we look at the embedded emissions and import and export activities for 50 sectors in the carbon leakage list. Besides the most affected cement, iron and steel, and petroleum products, the next in line are basic chemicals, fertilizers, industrial gases, aluminum and paper.
  • A CBAM should be accompanied by transition measures. To soften the blow to some industries – not least against the backdrop of the Covid-19 crisis – policymakers should introduce some transition measures. Options include subsidizing transition investments, implementing a ‘blank’ test phase, e.g. with free certificates being allocated to all participants, focusing on ‘test’ sectors like cement and steel and implementing bilateral preferential agreements, which relieve partners from the obligation of bearing the CBAM-related costs.
Markus Zimmer
Senior Expert, ESG
markus.zimmer@allianz.com