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CBAM: high risk for the EU to create tensions with the US

The Carbon Border Adjustment Mechanism (CBAM) is a key pillar of the European Green Deal, giving the EU climate diplomacy leadership in a sense.

However, despite all countries in the world have committed to raise their ambitions in the fight against climate change and to reach carbon neutrality by 2050, not all of them have implemented concrete strategies and some fears that a tool like the CBAM would create trade wars, unfairness and lack of competitiveness.

Speaking at the GLOBSEC 2021 Bratislava Forum, Pascal Canfin, Chair of the Committee on Environment, Public Health and Food Safety at the European Parliament, reminded that the CBAM won’t be a tax but just a mirror of the European Trading Scheme (ETS).

globsec CBAM
Panel discussion at the GLOBSEC 2021 Bratislava Forum.

“If the EU carbon price is of 52 euro one day, the CBAM will be 52 euro the very same day”, he said as an example. “It will be the exact mirror of the volume as well. Therefore, it can happen that parts of the carbon tax are not paid by some European industries because they still receive free allocations for part of the emissions.”

This is how his Committee would like to design the CBAM, without entering a trade war with EU partners, especially the United States.

“If we have a price that applies to our industries but then importers will pay zero, it will be a huge problem for our jobs, our competitiveness and, of course, climate reasons,” he said.

For Christian Egenhofer, Senior Research Associate at the School of Transnational Governance at the European University Institute and Florence and Associate Senior Research Fellow at the Centre for European Policy Studies, the free allocations must be eliminated.

“I am a bit worried that we are protecting the old industries too much,” he said. “If we look at industries like cement or steel, we see that in North Africa the carbon intensity is lower than in Europe. So what is the CBAM really achieving?”

From a long-term perspective, it would be counter-productive to keep the free allocation systems. The focus should be on investing in low-carbon cement and steel and new green industries and make sure that free allocations do not discourage the innovation of green technologies. 

“We share the same vision as the US but they have to understand our starting point as we cannot ask our companies to pay 60, 70 or 80 euros while others pay zero,” Mr Canfin underlined. “So we need to find an agreement with the US.”

“I agree that there is a high risk that what the EU is doing could create tensions with the US and developing countries especially because it could fell on them,” added Jennifer A Hillman, Senior Fellow for Trade and International Political Economy at the Council on Foreign Relations.

“But it also doing a tremendous job to assure that is fair,” she continued. “The goal on both sides of the Atlantic is the same: to reach net-zero. So, the devil is in the details. How the US is putting down emissions is mainly through regulations and incentives for investments in renewables, which is different from an ETS or a carbon tax. If the EU imposes a charge as a requirement, is the price a fair one? Is it equivalent to what EU industries are paying? US industries could say they will be double taxed.”

We did actually see some commitments also coming from the G7 that recently took place in Cornwall, including a very strong signal that there will be an absolute end for coal this year on an international level. However, commitments sometimes do not meet the urgency of the problem and many challenges remain.

In particular, Mr Canfin identified two industrial challenges ahead of us: digitisation and decarbonisation, admitting that the EU is in the race on digitisation but the main leaders are the US and China. On the other hand, decarbonisation is being led by the EU.

Photo: GLOBSEC 2021 Bratislava Forum.

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