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EU Green Deal: Carbon Border Adjustment Mechanism
On 23 July 2020, the European Commission launched public consultations on two initiatives that aim to maximise the impact of taxation in meeting the EU’s climate goals. The revision of the Energy Tax Directive(ETD) and the creation of a Carbon Border Adjustment Mechanism (CBAM) were identified in the European Green Deal as means to help with the transition towards a greener and more sustainable economy, together with the European Green Deal investment plan, the Just Transition Mechanism and other measures. In addition, the Commission’s Recovery Plan for Europe indicated that green own resources could contribute to financing the future EU budget, for recovery and growth in the wake of the COVID-19 pandemic.
The European Green Deal emphasized that “should differences in levels of ambition worldwide persist, as the EU increases its climate ambition, the Commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage”. Risk of carbon leakage means either that production is transferred from the EU to other countries with lower ambition for emission reduction, or that EU products are replaced by more carbon-intensive imports. If this risk materialises, there will be no reduction in global emissions, and this will frustrate the efforts of the EU and its industries to meet the global climate objectives of the Paris Agreement.
A Carbon Border Adjustment Mechanism (CBAM) would ensure that the price of imports reflects more accurately their carbon content. This measure will be designed to comply with World Trade Organization rules and other international obligations of the EU. This measure would be an alternative to the current free allocation of allowances or compensation for the increase in electricity costs that address the risk of carbon leakage, because of carbon pricing in the EU’s Emissions Trading System (ETS).
The Commission will develop a number of policy options based on the following building blocks:
1. Type of policy instrument:
The legal and technical feasibility of each measure will need to be carefully assessed, also in relation to the EU’s trade acquis (the rules of the World Trade Organisation and EU’s trade agreements) and other international commitments. The complementarity of the measure with internal carbon pricing, in particular the EU ETS, will also have to be assessed, as well as how it relates to the current measures to avoid the risk of carbon leakage. The measure should be commensurate with the internal EU carbon price.
2. Methodological approach to evaluating the carbon content and carbon pricing of imported products:
Under the EU ETS, a system of harmonised EU-wide benchmarks has been developed for industrial processes. To the extent that a sector is covered by the EU ETS, a border measure could be based on similar methodological considerations as for ETS, i.e. benchmark values, unless the exporter certifies a lower carbon content and/or a higher carbon cost at origin.
3. Sectoral scope:
A scoping in terms of sectors concerned will have to be defined to ensure that the measure applies where the risk of carbon leakage is the highest. The assessment will take as starting point the study currently underway that the Commission launched to identify the risk of carbon leakage in the third and fourth trading phases of the EU ETS.
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