Policy Note 49: Analysis of the EU Commission’s proposal to introduce a carbon border adjustment mechanism “CBAM”
In order to counteract the effects of climate change and global warming, a wide variety of measures are being taken to reduce CO2 emissions worldwide. However, stricter climate measures increase the risk of carbon leakage. This means that products affected by carbon pricing will escape European carbon pricing by relocating production to other parts of the world and importing additional goods. To counteract this risk, the EU Commission is planning to introduce a CO2 border adjustment mechanism, or CBAM for short (Carbon Border Adjustment Mechanism). This is intended to price the CO2 content of goods in certain sectors when they are imported into the EU.
However, the border adjustment proposed by the EU Commission has a number of weaknesses. For example, CBAM does not provide for an export exemption for European companies, which means that location neutrality with regard to the CO2 price cannot be guaranteed. As CBAM also only covers a few sectors, the measure cannot be regarded as a full border adjustment in the true sense of the word.
A further challenge also exists with regard to companies in poorer countries, the so-called LDCs (Least Developed Countries). For them, the bureaucratic and technical effort that CBAM entails by recording and reporting emissions could simply be too great. This would mean that if a company does not report any emissions, default values with a potentially high premium would be used instead. Ultimately, the design of CBAM is also dependent on WTO conformity. From the EU's perspective, it is important to avoid trade wars, especially in economically uncertain times. The way in which CBAM revenue is used also plays a key role here.
This policy note recommends the targeted promotion of innovation within the industrial sectors as the intended use of this revenue. In addition, the revenues should flow into the EU budget as planned, taking into account the earmarking in the area of climate protection. In general, EcoAustria is clearly in favor of the inclusion of export exemptions in CBAM. CBAM could therefore be used in combination with other countries worldwide, similar to a Climate Club, which would give the EU more negotiating power within the WTO and better protect it against a trade war. Finally, in order to counteract the challenges faced by LDCs, the Institute proposes supporting companies based there with lower surcharges if they are unable to report emissions values.
