Export subsidies are a ‘red line’ in EU carbon tariff negotiations, EU official says

"We cannot isolate exports and production. This would result in prohibited [export] subsidies, which we must avoid. We have a couple of red lines, and that’s one,” said Pasquale De Micco, a senior official at the European Commission’s tax department. [EURACTIV / YouTube]

The European Commission insists that exports from EU sectors covered by the bloc’s proposed EU carbon border adjustment mechanism (CBAM) should not be subsidised, despite calls from energy-intensive industries and some lawmakers to include export rebates.

Details of the EU’s proposed carbon tariff are currently under negotiation in the EU institutions and European industries are calling for export rebates to be included in the legislation.

The draft levy will apply to imports of electricity, iron and steel, aluminium, fertilisers, and cement. It is expected to phase in as of 2026 for a period of ten years, at the same rate as these sectors will see their free CO2 permits on the EU carbon market phased out.

But EU industries have warned that CBAM will not protect their exports against cheaper products from foreign manufacturers who are not subject to a similar carbon price. To make up for the loss of free allowances on the EU carbon market, they have called for export rebates to keep their industries competitive on global markets.

The European Commission’s CBAM proposal did not retain the idea of export rebates, arguing that these would represent export subsidies incompatible with WTO rules.

“We cannot isolate exports and production. This would result in prohibited [export] subsidies, which we must avoid. We have a couple of red lines, and that’s one,” said Pasquale De Micco, a senior official at the European Commission’s tax department.

Another ‘red line’ for the European Commission is to grant double protection for EU industries that are covered by CBAM and subsidised abroad at the same time – something that could also be challenged under global trade rules.

“We need to avoid falling into legal and economic traps,” De Micco told a recent EURACTIV event.

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.

Industry demands

The Commission official added that the economic impact of CBAM on exports are rather limited, accounting for just about 5% of total production across sectors covered.

However industries and trade unions are not convinced by this argument.

“The key is to keep in mind that an average is not the whole story. We need to have a more granular approach and a better picture of what possible problems might arise,” Benjamin Denis of industry trade union IndustriALL told the same event.

“If industrial sites are export-oriented, it might be detrimental to their margins and competitiveness, and in an open economy these are sooner or later translated into employment problems,” he added.

In addition, the industries covered by CBAM argue that they are already heavily affected by the COVID-19 crisis, the energy price hike and now Russia’s war on Ukraine – all of which might potentially change trade flows.

“Russia and Belarus have become extremely dominant in the fertiliser exports sector, and this is not healthy for a robust system,” said Luc Haustermans, head of EU public affairs at fertiliser company Yara. “From this point of view, we need to look again at CBAM, and redo some of the analysis, because some of the trade flows are going to change as a result of this crisis.”

A carbon border tax on fertilisers? Think twice, EU told

The fertiliser industry is increasingly cited as an ideal testing ground for the EU’s upcoming carbon border levy, due to be tabled in June. But industry figures warn this risks causing an increase in food prices that could trigger social unrest.

‘Climate clubs’ won’t replace CBAM

The EU’s carbon border adjustment mechanism is aimed at persuading other countries to adopt similar carbon pricing policies as the 27-nation bloc.

Export-reliant Germany hopes this will encourage the creation of a ‘climate club’ – an alliance of like-minded nations with no carbon tariffs pushing for more climate ambition at global level.

But centre-right MEP Maria Spyraki poured cold water on that notion, saying a potential ‘climate club’ would not make the EU’s carbon tariff redundant: “Of course [a climate alliance] is something that can work, but I prefer European solutions and we need to maintain European leadership,”she said. “We need CBAM to set standards, and it is important to incentivise third countries,” she told the EURACTIV event.

Besides, the EU is likely to continue being a global trailblazer when it comes to carbon pricing with the ongoing reform of the EU’s Emissions Trading Scheme (ETS). “The EU is still one of the few economies with an effective ETS, and this will be even more true with the ongoing EU ETS reform,” said IndustriALL’s Denis.

Overall, the EU’s carbon border levy could prompt a big change in terms of international cooperation, according to Aylin Shakwat, project manager for industry at think-tank Agora Energiewende. “It would be a new way of doing business, not just about the product itself but there will be another metric – embedded carbon emissions – that will measure your competitiveness,” she said.

> Watch the full event below:

[Edited by Frédéric Simon]

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