Progress on carbon border adjustments in Europe

The recent vote in the European parliament shows it to be strongly in favour of introducing carbon border adjustment mechanisms (CBAMs) for sectors covered by the EUETS.

On 10th March the European Parliament passed a resolution on the design of a WTO-compatible EU carbon border adjustment mechanism (CBAM)[i].  The vote was non-binding.  However it shows where the debate has reached. 

Perhaps the most striking thing about the vote was the size of the support for the introduction of CBAMs.  The Parliament voted 444 to 70 in favour.  This stands in contrast to the position as recently as 2017, when a majority in the Parliament voted against such measures.  (An initial amendment on possibility of including imports in the EU ETS was passed in 2008, the start of Phase II of EU ETS, but nothing has ever been implemented.)

The vote recommends implementing CBAMs by setting up a separate pool of allowances, mirroring the ETS price[ii].  This places no restriction on the volume of emissions embodied in imports, but ensures that it pays the same carbon price as EU producers.  A further provision states that importers should not to be charged twice for the carbon content of their products, implying an adjustment or rebate for any carbon price already paid.

The proposed sectoral coverage includes all imports of products and commodities covered by the EUETS.  As a starting point it recommends covering at least power generation, steel, cement, aluminium, oil refining, paper, glass, chemicals and fertilizers, which would already lead to 94% of industrial emissions under the EUETS being covered.

Wording on the need for a rapid phase out of free allowances was removed by a narrow vote on an amendment.  However the resolution as passed notes the incompatibility of CBAMs with free allocation for the same tonne of emissions, and some sort of phase-out of free allocation seems clearly envisaged.

There is mention of special treatment for Least Developed Countries, but there is no explanation of what this means.  Possibilities range from the benign, for example using revenue raised from CBAMs to assist in achieving low carbon development pathways, to the highly undesirable, for example giving exemptions that incentivise polluting industry to move there to avoid CBAMs.

The resolution indicates that the ultimate goal is for CBAMs to disappear as the world adopts similarly robust pricing schemes.  However this seems a distant prospect.  The likelihood of CBAMs needing to be retained seems to be implied by a recommendation that an independent observatory body be established to monitor implementation.

The next major step will be when the Commission publishes its proposals in the summer. It remains unclear what those proposals will be and what will eventually be passed.  Indeed it remains possible that eventually no CBAM proposals will be passed into law, or that they may be introduced to a quite limited extent.  But as things stand their introduction looks likely, and it will be one of the most significant changes to the EUETS since its introduction.

Adam Whitmore – 12th April 2021


[i] The text is here https://www.europarl.europa.eu/doceo/document/TA-9-2021-0071_EN.pdf

[ii] For a review of this and other design issues, see my report from late 2019, here: https://sandbag.be/index.php/project/the-abc-of-bcas/

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