EU in balancing act over carbon border levy, industry concerns

The blast furnaces of Tata Steel seen from the beach in Wijk aan Zee, Netherlands, 21 January 2022. [EPA-EFE/Koen van Weel]

The European Commission’s proposed Carbon Border Adjustment Mechanism is meant to replace free allowances distributed to industry under the existing EU ETS, but European steelmakers worry the transition will be a mess and leave them without protection from foreign competitors.

Ten years ago, the price of carbon in the EU’s Emissions Trading System (ETS) was hovering around €6 per tonne of CO2 equivalent – way too low to trigger the kind of emissions reductions the system was designed to encourage.

Today that price has risen to €97 per tonne, thanks to a market intervention decided several years ago and a European Green Deal launched in 2019 which includes steeper emission cuts for 2030 on the way to reaching climate neutrality by mid-century.

But the high price of carbon on the ETS has reopened long-standing concerns about carbon leakage, an anticipated phenomenon whereby companies would move production outside the EU to avoid climate regulations.

European steelmakers, whose emissions are covered by the ETS, warned they would face difficulty competing with foreign producers who don’t face similar costs.

Up till now, these concerns have been met by giving them free allowances under the ETS, effectively a subsidy scheme that rewards steelmakers with carbon credits even when they don’t cut emissions.

Now, the European Commission has proposed replacing free allowances by a new Carbon Border Adjustment Mechanism under which importers would have to buy carbon certificates corresponding to the price paid by European manufacturers. Foreign producers would be exempted from the levy only if they can show they paid a similar carbon price at home. And importers would then pay the difference.

However, heavy industries such as the iron and steel sector have raised concerns about the timing of this transition. Their worry is that they will lose their free allowances without any guarantee that CBAM will be in place to take over.

Under the Commission’s proposal, CBAM will be phased in as of 2026 for a period of ten years, by which time EU industries covered by the scheme will stop receiving free CO2 permits on the EU carbon market, a move aimed at ensuring the system is compatible with World Trade Organisation rules.

“We’re not against phasing out of free allocations but CBAM has to be tested on its effectiveness first before free allocation is being reduced,” said Axel Eggert, director general of Eurofer, the European steel industry association.

“If the carbon levy is only implemented from 2026, only then we’ll see if the system is working or not, and that period will take two to three years. In this period, we need to keep the free allocation level as it is today,” Eggert told participants at a EURACTIV online debate last week.

Eurofer estimates that the combined impact of CBAM and the loss of free allowances under the ETS will cost nearly €14 billion in 2030 under a ‘business as usual’ emissions scenario, and €8.4 billion if the sector is able to reduce its emissions by 30% by 2030.

EU industry shuns carbon border levy, calls for export rebates

European industries covered by the EU’s future carbon border adjustment mechanism (CBAM) have expressed doubts about the proposal, tabled last week. In addition to border measures, they are calling for an export rebate scheme to help green EU products compete on global markets.

Transition

However, this idea of a phase-in transition period is controversial, with some suspecting heavy industry is just trying to prolong their free allowances for as long as possible.

“We as politicians need to make sure that we set up a policy scheme that works and then stick to it, and believe in what we’re doing,” said Swedish Liberal MEP Emma Wiesner, who is helping craft the European Parliament’s position on free allowances.

She added she wants to guard against harm to European industry by expanding CBAM in three dimensions – to cover more sectors, cover indirect emissions, and go faster.

“The money has to come some from somewhere, so we can’t just perpetuate free allocation at the full benchmark until 2030,” added Oliver Sartor, a senior adviser at the climate think tank Agora Energiewende. “But at the same time, we have to be careful about how quickly” we phase out free allowances, he added.

“So a balancing act is needed here in terms of the timing,” he said.

Agora Energiewende’s proposal would be to phase out free allowances while reserving the possibility to introduce export rebates in the form of free allocations for the exported production from 2030 onwards in case CBAM doesn’t materialise.

“We also have to commit to including indirect emissions in CBAM from 2030,” Sartor remarked, referring to emissions that are not directly linked to the manufacturing of a product. Without the inclusion of indirect emissions, foreign producers could switch from directly using fossil fuels to using fossil-based electricity in order to avoid the CBAM charge, he said.

German industry wants export rebates, free certificates and a carbon border levy

As France continues to push for a new border levy for carbon-intensive products entering the EU, German stakeholders fear that the removal of their free permits to pollute could destroy their competitiveness abroad.

Indirect emissions and export rebates

Maria Elena Scoppio, director for indirect taxation and tax administration at the European Commission who is coordinating the CBAM file, said she is open to looking at indirect emissions.

“We didn’t include indirect emissions in our initial proposal, to be very honest because we wanted to make sure we had a methodology to calculate this and at the time it was not mature,” she told participants at the EURACTIV event.

“I am not against also having a look at the indirect emissions,” she continued, “but for the moment we are able to quantify and calculate only the direct emissions.”

Scoppio also attempted to clarify how the levy is designed to work in practice. “We are just applying a mechanism at the border which will apply to the product – not on the installation, not on the country, not on the industry, not on the factory, not on the firm,” she said.

“No matter where the product comes from, no matter how it was produced, we will be calculating what is the carbon content of the specific good, and then there will be a calculation of what is the CBAM adjustment at the border,” she continued.

“It goes without saying that those countries that already have an ETS that is fully linked to ours will have no problem.”

Finnish centre-left MEP Miapetra Kumpula-Natri, who is also working on the ETS file in the European Parliament, said she is concerned that the system as envisaged “doesn’t make a level playing field for the European exporters.”

“If we have better steel for example produced in Europe than produced in Turkey or China, and we are exporting to North Africa or USA, only ours carries the price – and that’s the question in the air.”

Brussels rules out double carbon compensation for EU steelmakers

The European Commission has made it clear that industries covered by the EU’s upcoming carbon border levy will no longer receive free CO2 allowances under the bloc’s carbon market, the emissions trading scheme (EU ETS).

Crucial decade

Judith Kirton-Darling, Deputy General Secretary of trade union confederation IndustriAll, agreed that getting the policy mix right will be crucial – especially at this time of transition for heavy industry sectors like steel.

“This is a crucial decade, because half of blast furnaces need to be replaced” due to the EU’s updated climate goals for 2030, she noted. “The reform of the ETS has to be placed in that bigger picture. We’d like to see a European steel action plan with CBAM as one tool in the toolbox.”

The question of when and how free allowances will be phased out to consider the incoming CBAM will be hammered out in negotiations between the European Parliament and national governments in the EU Council over the coming months.

A bigger uncertainty lies ahead, however: Even if the ETS is adjusted to take the new border charge into account, the scheme risks never being implemented if it is successfully challenged at the World Trade Organisation or if the EU drops it as a result of political pressure coming from China or the US.

If that happens, it may be back to the drawing board for figuring out how the ETS of the future will protect European industry and avoid carbon leakage without a CBAM.

> Watch the full EURACTIV event on video:

[Edited by Frédéric Simon]

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