A levy on carbon-intensive products is in the works in the EU, which would mean producers of EU goods pay for their emissions wherever they are in the world. It will seriously impact Europe’s trading partners, making dialogue and understanding crucial to its success writes Mohammed Chahim after visiting the US.
Mohammed Chahim is a Dutch Member of the European Parliament, vice-president of the Socialists and Democrats and rapporteur for the carbon border adjustment mechanism (CBAM).
During the first week of March, I visited the US to discuss the legislative proposal to establish a Carbon Border Adjustment Mechanism in the EU. As the European Parliament’s rapporteur of this principal legislation, I had discussions with senators, members of the House, government officials and civil society.
Given the impact of CBAM on our trading partners, it is critical to ensure sufficient dialogue and understanding of each other’s positions. Some have concerns, others see opportunities. I emphasised these three key points during my CBAM trip to Washington DC.
CBAM does not favour nor discriminate
‘What does this mean for us?’ was one of the main questions that came up in almost every conversation I had. Usually followed by: ‘Is there any chance the US will be exempted?’
While the legislative process is far from finished, I believe that there is a broad majority, both in the Parliament and the Council, for a CBAM without exemptions.
The strength of the CBAM lies in a correct and WTO-compatible implementation that does not discriminate or favour any trading partner.
When I explained that we are setting the same conditions on imports as we do for our own producers, there was a lot of understanding. Most people recognise the reasonableness behind this.
Talking about exemptions, my interlocutors often mentioned ‘climate clubs’. The German government introduced this concept as an alliance for climate, competitiveness and industry.
Right after the publication of the CBAM proposal, this caused some confusion as to what extent this potential climate club and its members would be exempt from CBAM. Only recently, the German government clarified that they envisage the climate clubs complementing CBAM.
This is the same message I conveyed in Washington. A climate club is a valuable instrument, especially to increase international commitment to higher climate goals, foster cooperation and create solidarity among countries. Let this – however – exist next to CBAM.
Different carbon border mechanisms can co-exist
This might be unexpected, as there is currently no federal CO2 price in place, but talks about a US Carbon Border Adjustment Mechanism are ongoing. Senator Coons and Representative Peters have introduced legislation to support US workers and international climate cooperation.
As one of the senators stated: ‘On the topic of a CBAM, we are at a bipartisan tipping point’.
More and more Republicans are getting behind the idea of CBAM. Their motivation is, however, slightly different from ours. Where we see CBAM as a climate measure, many Americans see CBAM as an excellent tool to create a level playing field between the US and, for example, Chinese producers.
It is not necessarily the best motivation, but if it can help us open the door to global carbon pricing, we should take it.
CBAM is a self-eliminating tax. We do not want countries to pay at our border. If one does not have to pay at the European border for some products, this means that producers have invested in decarbonisation or already paid the price for their emissions.
CBAM offers opportunities
During my stay in Washington, people told me that US producers are among the cleanest in the world and often beat European producers.
While this is the case for some industrial processes, it does not apply to all industries.
I pointed out that, if this is true, our CBAM will be a very beneficial instrument to them. The carbon intensity of a product is directly reflected in the required CBAM certificates and, thus, in the price.
In other words: if your production is really the cleanest in the world, then the European market will become even more accessible to US products. Amongst US lawmakers, precisely because of this, understanding is growing. They see opportunities.
Looking back at my visit, I am happy with the conversations I had. It is essential not to neglect our trading partners in the process of setting up this mechanism.
The European Commission announced that they would work with third countries to improve the understanding of CBAM before the actual start of the legislation. I truly believe this understanding is required to foster broader acceptance.
By introducing this CBAM, we are, in fact, extending our own carbon pricing system to the rest of the world, an essential step in the global battle against climate change. The world is watching us, so it is important to start ambitious and set a good example.
The proposal to set up a European Carbon Border Adjustment Mechanism was published on 14 July 2021. The European Commission proposes to start with five sectors (electricity, cement, steel, aluminium and fertilisers) and phase in the CBAM over a period of 10 years, in which it will gradually replace the free allocation of allowances under the EU Emissions Trading System (EU ETS) which is based on product benchmarks. While the Council adopted a general approach on 15 March 2022, the European Parliament is currently working on a position. A vote in the ENVI committee is scheduled for 11 May 2022.