The European Commission released a Carbon Border Adjustment Mechanism (CBAM) proposal in July 2021 to level the playing field between importers and domestic producers who are subject to the EU Emissions Trading System (ETS). The CBAM would levy a fee on imported products, mirroring domestic producers’ emissions costs under the ETS. Earlier this month, the lead rapporteur on CBAM at the European Parliament’s environment committee, Mohammed Chahim, published a draft report with suggested amendments to the Commission’s proposal. The draft report includes many detailed recommendations for a more ambitious CBAM in scope and timeline.
Here are some highlights of the draft report’s recommendations.
- Broader scope: The draft report recommends adding organic chemicals, hydrogen and polymers to the product list to be covered under CBAM. The Commission’s July 2021 proposal only includes imported goods in six sectors: cement, iron, steel, aluminum, fertilizer, and electricity. Additionally, the draft report recommends including indirect emissions associated with purchased electricity in CBAM after the initial phase.
- Faster timeline: The draft report proposes a faster implementation timeline—shortening the transitional phase from three to two years and implementing CBAM from 2025. The Commission’s proposal has a three-year transitional phase of 2023-2026 and the CBAM won’t go into effect until 2026.
- Speedier phase-out of ETS free allowances: Currently, free allowances are given to certain industries under the EU ETS to preserve their competitiveness against foreign producers. The draft report recommends phasing out the free allowances entirely by 2028 instead of by 2036 as proposed by the Commission.
- Only explicit carbon pricing qualifies for exemptions from CBAM: The draft report reiterates the Commission’s proposal that only exporting countries with explicit carbon pricing policies in place can be qualified for full or partial exemptions from the import levy. It explains that although implicit carbon pricing policies do not warrant exemptions from CBAM, they would result in a lower import fee anyway due to lower emissions associated with the imported goods.
The draft report has several great recommendations to make CBAM more ambitious, including a broader scope and faster timelines of phasing-in the CBAM and phasing-out the free allowances. If the EU is serious about its decarbonization goals and addressing emissions embedded in trade, then a more ambitious CBAM would definitely help.
The draft report will be discussed in the environment committee and voted on later this year. It will serve as the initial draft of amendments and set the stage for negotiations during the trilogues between the European Parliament, the Council, and the Commission.
I would like to see two amendments in the following negotiations on CBAM to further improve the policy.
- First, export rebates are given to the EU’s exporters. With import taxes and export rebates mirroring the carbon prices under the EU ETS, the EU CBAM would look more like a standard border adjustment mechanism implemented with a domestic carbon tax that taxes goods based on where they are consumed. The current CBAM proposal is de facto an import tariff. My previous blog post explains the differences between an import tariff and a border adjustment and why they matter.
- Second, no exemptions are given to the EU’s trading partners regardless of whether they have explicit, implicit, or no carbon pricing policies in place. A well-designed border adjustment mechanism aims to tax all goods consumed within a jurisdiction, including domestically produced goods and imported goods. It does not need to account for policies implemented in home countries. Providing exemptions to credit foreign carbon pricing policies would lead to legal and administrative issues.
The finalized CBAM legislation may look slightly or much different from the current version. Regardless, the EU is serious about achieving its decarbonization goals on domestic and international trade fronts. The rapporteur’s draft report has paved the way for more discussions on CBAM to help finetune this critical policy.