Commission weighing up options on CO2 border tax

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The is still a lot of technical work to be done before the Commission makes a proposal on a possible “adjustment mechanism” to compensate EU industries which find themselves at a competitive disadvantage over countries with less stringent CO2 regulations, according to Jos Delbeke, a top official at the Commission’s Environment Directorate.

Jos Delbeke is Deputy Director General at the Commission’s Environment Directorate.

In its recent proposal to revise the EU emissions trading scheme, the Commission seems to leave the door open to so-called sectoral approaches whereby heavy industries like steel or cement would forge global deals to reduce CO2 emissions. How do you actually see this happening? 

We see the sectoral approaches within the context of the EU-ETS, so it is not one or the other, it is the two combined, I think this is the first important point.

The second is that in the sectoral approaches, we see business as the main driver. So if business starts talking around the globe to their colleagues in the same sector, exchange ideas, exchange technologies or cooperate on strategic issues – that’s fine with us, but the emphasis is on businesses to act. 

At a later stage, once these businesses come forward with more refined ideas and evidence – because frankly we have not that much evidence about the production of steel or aluminium or chemical-based products in China or India – once we have that evidence then we can really talk business and that evidence lies in the private sector. So if the private sector is organising itself in the first stretch, that’s great – then we can open up the discussion and see what public authorities can do with that material. 

Do you expect a sectoral component in the forthcoming international agreement on climate change to replace the Kyoto Protocol after 2012?

I would see a sectoral component, as you are rightly putting it, but not as an alternative. I think we should be realistic that the UN set up is among sovereign states. And I would not think that countries like China, India, Brazil or South Africa are going to surrender their authority to act to [businesses in] those sectors and at the same time withhold from any decision-making processes at the UN level. So it is a component, but it is not taking over.

How does the Commission see international trading of emissions reduction certificates (so-called CDM) developing after 2012 within the context of the EU emissions trading scheme?

First, we create a very stable perspective for the use of CDM for the period until 2020, even in the absence of an international agreement, that’s one. 

Two, we offer banking of credits from CDM between the current period and the next period. That is not foreseen in the current directive. And three, we want to have a good discussion on CDM at international level. 

We see that some major players like the United States and Canada are hesitant about CDM and it cannot be the EU on its own that is giving life to the CDM.

So what can be improved for the CDM? – A debate on baselines, administration, bureaucracy, continuity and on stable decision-making processes. And we are very much open to having that discussion.

Could CDMs be the starting point for a truly global emissions trading scheme?

If well designed, yes, but better designing still needs to be done. So far, it’s a credit-generating machine, it has to be geared up as a first stepping stone towards a trading mechanism.

The Commission has said it will propose a ‘compensation mechanism’ to prevent ‘carbon leakage’ whereby EU industries covered by the EU–ETS move to other parts of the world, like China or India, where there are no constraints on CO2 emissions. However, the US and the UK have warned that this could open trade problems. What is your view on this?

The Commission has actually not made proposals on this. The Commission has said that it would define the sectors in which carbon leakage would continue to exist after the conclusion of an international agreement, and that, in a second step, it would make proposals – at the latest by 2011. 

That proposal could basically be an internal solution or an external solution. An internal solution is that we could continue with free allocation – we could differentiate the allowances given for free to a certain number of companies – or we could go for an external solution, which is the one that French President Sarkozy mentioned when he was on a visit to China.

Now, on the external solution, there are a number of important elements that need to be sorted out: WTO compatibility, retaliation, but also the technical nitty-gritty. 

The new investments being made in the emerging economies in state of the art technology are actually being made by our companies. So before we move into compensation at the border, we’d better compare the energy and carbon efficiency of the investments in which we think we have a competitive disadvantage. 

I think a lot of technical work needs to be done there, that’s why the Commission is giving itself a bit of time to do the work. Not that we are going to let it linger on but there is a little bit of homework to be done.

But the emphasis is of course on the conclusion of an international agreement, which could sort out most of the problems that we are encountering on carbon leakage. 

Regarding the possible continuation of free allocations: This system has been highly criticised already during the first phase of the EU-ETS so obviously it cannot be taken as a credible option by the Commission…

Well, we haven’t yet gone through the whole issue that industry is bringing to the table of setting technical standards – or benchmarks – against which allocation is going to be done. Benchmarks are defining a kind of “anchor-point” technology that would be recommended: beyond the use of that technology, you would get a reward and if you are not going for that state-of-the-art technology you would get less.

I think we have not yet gone through the entire exercise on this. We are opening a discussion with industry on this issue and we are going to have a stakeholder consultation with industry, with the member states, with stakeholders and NGOs. 

So benchmarking along some industrial sectors would be the basis for this potential compensation mechanism?

Yes, with one caveat: there seems to be a wide variety of definitions of what bechnmarking actually means. I would cautiously say it is technical standards for installations, for products, etc.

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