As France continues to push for a new border levy for carbon-intensive products entering the EU, German stakeholders fear that removing their free permits to pollute could destroy their competitiveness abroad.
The EU carbon price is approaching €100 per tonne and imposes climate protection costs on European industries that are unmatched anywhere else in the world.
So to stop companies leaving Europe for countries where it is cheaper to produce emissions, known as “carbon leakage”, the EU currently allows certain businesses to escape the carbon price via the free allocation of emission certificates.
But now, the European Commission plans to phase out these free allocation certificates as it introduces its carbon border adjustment mechanism (CBAM) for carbon-intensive imports into the bloc. This would protect EU companies as they decarbonise from those facing fewer climate regulations – a protectionist measure that France backs.
However, the end of free allocation will mean industry feels the full brunt of carbon pricing when competing outside of Europe, a concern which has it clamouring for additional measures.
“German industry would prefer all three measures: CBAM, export rebates and the free allocation of emission certificates,” said Michael Jakob, co-author of a survey of civil society, scientists and industry in Germany.
While the research found that all stakeholders surveyed “are in favour of CBAM and expect it to be introduced”, wariness on trade, administrative and legal risks remained high.
In particular, participants from businesses, associations and academia expressed more significant concerns than respondents from civil society that a unilateral border adjustment could isolate the EU politically and be challenging to implement both administratively and legally.
The survey, conducted anonymously, echoes much of the initial sentiment expressed by industry following the European Commission’s proposal for CBAM in July 2021.
“The border adjustment is still untested and involves considerable risks,” warned Hans Jürgen Kerkhoff, president of the German steel industry association, in July 2021. He lamented that free CO2 credits for the industry will be “massively melted down” past 2030.
Respondents from companies and associations are much more in favour of continuing and possibly strengthening the free allocation of emission allowances than other respondents, note the survey’s authors.
The German companies surveyed “call for a refund on CO2 prices for exports” for exports leaving the EU, the producers of which will have to pay the full carbon price without the support of free allocation. But civil society actors and scientists were found to be critical of export rebates.
Alongside this, German companies and associations were critical of the proposed uses for the income that CBAM would generate.
The European Commission has proposed to use the revenues of its carbon border levy to generate so-called “own resources” and pay back the historic loans taken out during the COVID-19 pandemic.
But German businesses want the money used to subsidise “green technologies in the EU”.
The devil lies in free allocation
German businesses’ push to maintain the contentious free allocation system will likely conflict with the French-led push to introduce CBAM.
The researchers note that respondents from companies and associations are much more in favour of continuing and possibly strengthening the free allocation of emission allowances.
But the very idea of CBAM is to function as a replacement for the contentious free allocation system. Some have referred to it as a hidden subsidy for the steel industry, which receives about €3 billion more in annual “free” emissions certificates than they would need.
“Steel and iron get more free allowances than they pollute,” explained energy analyst Thierry Bros. “It’s effectively a hidden subsidy,” he said on Twitter.
Thus, the EU wants to do away with the scheme.
“The CBAM would constitute an alternative to the free allocation mechanism currently in place addressing the risk of carbon leakage,” explained Green Deal Chief Frans Timmermans in a written response to an EU lawmaker.
With the weight of the French Council presidency behind the EU’s push for CBAM, things are moving fast. On 28 February, the European Parliament’s environmental committee ENVI is expected to vote on the text before putting it to a plenary vote.
[Edited by Alice Taylor]