Decarbonizing contending industries: policy design and the EU’s CBAM

ABSTRACT

As part of its ‘Fit for 55’ package to realize a previously agreed upon 55% reduction in greenhouse gas emissions by 2030 (as compared to 1990 levels) along with a net-zero by 2050 target, the European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) that phases out free allowances by 2035. Although most initial commentary has focused on potential conflict with the EU’s international trading partners from this renewed effort to price carbon while managing ‘carbon leakage’, policymakers may face greater challenges in their efforts to withdraw the highly visible benefit of free permits from domestic industry. This Perspective analyzes key policy dynamics relating to the imposition of burdens on powerful producer interests, and identifies where obstacles to policy change in the issue-area of carbon border adjustments (CBAs) are most likely to arise.

Key policy insights:

• Policy conflict over CBAM appears likely to follow unfamiliar geopolitical or sectoral lines.

• Internationally, several major trading partners have signaled a willingness to align their own emissions trading policies more closely with those of the EU and may even end up ‘racing to the top’ in harmonization efforts.

• Domestically, EU industries have expressed relatively undivided reservations about the CBAM proposal.

• Targeted domestic sectors will likely be privately assured that burdens are minimal, or compensated by new subsidies or side payments, despite potential violations of international trade law principles of non-discrimination and national treatment.

• Nonetheless, if CBAM simply disregards exporting countries’ carbon prices, or effectively subsidizes domestic heavy industry by providing them with free allowances at the same time that importers are charged with the adjustment, then international conflict is more likely.

KEYWORDS:

• Carbon border adjustment
• emissions trading
• international trade
• competitiveness
• carbon pricing
• political economy

Notes

1 See, e.g. European Aluminium’s (2020) official feedback submission to the Commission: Aluminium’s unique properties and uses in energy-efficient products for buildings, packaging and mobility (amongst others) also make it an essential material in the transition towards carbon neutrality. It is a key element for the production of the technologies that will lead Europe towards carbon neutrality, such as RES units and electricity/data transmission grids. Recycling aluminium is another important way of saving CO2 emissions and energy. Preserving our primary and semi-manufacturing production as well as further developing our recycling activities will be absolutely necessary in order to meet the growing demand for aluminium products, while reducing our dependency on imports … The EU’s priority should firstly be to maintain and improve indirect ETS costs compensation schemes and trade defense instruments to protect and preserve our value chain in Europe.