INTA

Committee on International Trade (INTA)

The push for a carbon border adjustment mechanism (CBAM) on imported goods has led several trading partners to express concern or even opposition on the basis of fairness. With the World Trade Organisation criteria, EU green targets and competition rules having to be met, how can the CBAM be implemented?


By: Ahmad Raza (UK) and Jack Nassri (SE)

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What?

The aim to achieve a climate-neutral Europe by 2030 has consistently motivated the European Union (EU) to implement policies aiming to reduce the effects of climate change. Therefore it would drive Europe to live up to its climate goals as part of the European Green Deal. In such efforts, the EU has long debated the introduction of a Carbon Border Adjustment Mechanism (CBAM) ever since its first proposal in 2007 aiming to reduce carbon leakage via a carbon price on certain imports.


The controversial CBAM policies theoretically aim to reduce the effects of climate change by reaching a consensus with major companies. Hence, it encourages them to not re-establish trade with other countries that are less strict about their emissions, which puts Europe at loss without reducing global emissions. The final design of the CBAM will avoid companies moving their intensive carbon production offshore. Companies have already begun to show their concerns about the introduction of a CBAM, saying it will disadvantage them against the World Trade Organisation’s (WTO) criteria while also pressuring them into completing their EU green targets. However, the importance of balancing the "most-favoured-nation" treatment was emphasised, meaning if the trade focuses mainly on States with lower emission percentages, it will leave other states out to face a “discriminative” treatment because of their carbon footprint.


Why?


How effective is the CBAM?

As mentioned previously, the CBAM puts a tax on imported goods based on their carbon footprint to restrict emissions leakage. There are a lot of opinions regarding the previous proposals of a CBAM. On one hand, there are plenty of challenges to overcome when implementing the CBAM policy, while on the other hand implementing such policies will help lower the greenhouse gas emission footprints. Nevertheless, the general consensus is that the CBAM policies should align with WTO rules. The WTO in this case will see the policies as a new tariff and it might be viewed as a trade barrier.

What are the important challenges to overcome?

The main concern of implementing the CBAM policy is that it could have negative consequences for the developing economies such as Jordan and Venezuela by cutting their export income and/or delaying the development of the export-oriented industries. Developing States might argue that the policy runs counter to the Paris Agreement and will push them to cut emissions more than what they pledged. The CBAM could also transgress the Common But Differentiated Responsibility (CBDR) principle which highlights that developing States do not share equal responsibility as developed States in addressing climate and environmental issues.

CBAM would have an impact on developing States. The impact will depend a great deal on how the policy is designed; Since developing States are on their way to become developed by producing and exporting to grow their economy. This transition will release huge amounts of carbon to the air, so for example States implementing the CBAM will avoid dealing with the developing states as much as possible because of their carbon footprint, while States which produce eco-friendly products will have better connections with States implementing a CBAM because of their small footprint. The particular reason for this is that when a State is producing and exporting in a “non-eco-friendly” way, it will add to its carbon footprint which in return will affect the connection between them and States implementing a CBAM. Because of this procedure it will be extremely difficult to convince huge manufacturing states such as the U.S and China to follow such policies.

The impact of a CBAM on a States’ exportation depends mainly on three factors:

1. The level of fossil fuel intensity of the state’s industry.

2. The share of emission-intensive goods in its exports.

3. The percentage of GDP generated by the State’s exports.

From a practical viewpoint, CBAM would not have a significant impact on developing economies that still do not export large quantities of carbon-intensive goods like steel, coke (fuel), aluminum and cement. For instance, in 2019 alone, 92.3% of the East African Community (EAC) States exports were primary products and 81% of which were agricultural products. Such products are free from the European Emissions Trading System (EU ETS) as it will make it “extremely challenging” for these States. The reason for this is that when developing economies are being restricted from “overproducing”, they will not be able to keep up with the rest of the world. This they will stay in their place as “developing economies,” herewith will make it “extremely challenging.”

As mentioned previously, the main reasons for implementing the CBAM are to protect the EU’s domestic industries as well as preventing carbon leakage. However, the CBAM could also reshape the developing State’s path to become a more clean export centre. The CBAM aims to make sure that there are ambitious policies around the globe that strive to avoid carbon leakage as much as possible. A European CBAM could encourage developing economies to pool together and recreate their version of CBAM policies based on emissions average income.

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Who?

Every industrial sector that relies on the EU’s imports will be directly impacted depending on how carbon-intense the imports are and how often they import these products. On a smaller scale, workers in these industries will experience a change in the products they manufacture to reduce carbon emissions as well. The implementation of a CBAM will further impact the trade associations due to the new negotiations between them and the EU.


The European Commission (EC) being the executive branch of the EU, responsible for proposing legislation, implementing decisions and upholding EU treaties, might experience fluctuations in the trade deals they’ve previously secured with foreign trading partners if they adopt a CBAM. The European Commission is also responsible for the ratification of the European Green Deal which sets goals for Europe to be climate-neutral by 2050 leading to the discussion of policies including the CBAM that would enable Europe to achieve this in case a CBAM is accepted. The Directorate-General for Trade (DG TRADE) will continue to work with the WTO to ensure fair rules are implemented across the global economy regardless of the new circumstance.


The World Trade Organisation (WTO) is an international organisation that coordinates trade across countries which must abide by the WTO agreements in return. Some rules of the WTO that conflict with some proposals of the CBAM include the equal treatment of similar products and treating domestic and foreign producers equally. Additionally, the WTO’s Committee on Trade and Environment (CTE) is responsible for sustainable development in the Trade’s sector.


Although every Member State (MS) is affected by a CBAM, their governments are not responsible for trade outside the EU. This is one of the reasons why a unanimous vote in favour of the CBAM is important in ensuring a peaceful relationship between the EU and Member States.


The implementation of a CBAM should not cause further carbon leakage and therefore the private sector, including foreign exporters, remains a key stakeholder since they need to be satisfied with the final design of the CBAM to minimise the risk of drastic changes in the trade deals with the EU.


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How?

Previous proposals of the CBAM

Since 2007, the race to achieve a “climate-neutral” Europe by 2050 has led to many different versions of a carbon border tax being suggested. The first suggestion of reforming the EU Emissions Trading System (EU ETS), in 2007, was dismissed following various high-emitting industries showing concerns about an increase in carbon leakage and loss of competitiveness. In 2009, the French government proposed a similar reform of the EU ETS with the introduction of a ‘carbon inclusion mechanism’, compliant with the WTO rules, which would establish the requirement of importers to purchase emission allowances. However, this proposal was also rejected by the European Commission. In 2016, another proposal by the French government suggested implementing a pricing mechanism for cement importers across the EU and removing the free allowances granted to these industries. The European Parliament also rejected this proposal due to the absence of a strong justification for the measures and their conflicting compliance with the WTO rules. All three of these proposals were declined either because they challenged certain guidelines of the WTO or led to favoured free allowance allocations under the EU ETS. Regardless, in January 2020, the president of the European Commission, Ursula von der Leyen, reiterated that “there is no point in only reducing greenhouse gas emission at home, if we increase the imports of CO2 abroad” while further suggesting that one method of actually making an impact would be through the introduction of a CBAM. While assuming that the EU does decide to implement a CBAM, what transition measures do you think should accompany this?


The aim and outcome of the recent public consultations

On the 23rd July 2020, the European Commission launched a public consultation to assess how parties wanted the CBAM to be shaped. This consultation was aimed at various stakeholders, NGOs, citizens, trade unions, academic institutions and many more organisations that would be directly impacted by a CBAM. From the 600+ responses collected, carbon leakage was seen as a big issue and the ideal CBAM for the participants seemed to be in the form of a tax applied on imported products from sectors that could contribute to carbon leakage. A unanimous vote is vital for the Commission to implement a CBAM and so as the Committee on International Trade, we must take the results of such consultations into account when brainstorming our proposals so that they satisfy the needs of as many organisations as possible.


Some questions to ask yourself when analysing previous successes and failures of the CBAM:


  • Should the European Commission be working with key stakeholders, such as the WTO, to come up with a more globally harmonised mechanism to achieve a more ‘climate-neutral’ state, or continue to work on a mechanism that mainly affects foreign suppliers to the EU?

  • Is it better to continue working on a 4th revised version of the CBAM or would it be better to start focusing more on other solutions including the promotion of low-carbon technologies and mass production through public support programmes, as suggested by the think tank Bruegel?


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!! RESEARCH CHALLENGE !!

Now that you have a good overview of your topic, we encourage you to conduct some of your own research. Try to use the pre-session time to explore the conflict we are yet to discuss together and make sure to reserve any questions you may have for us! To help you structure your research, we’ve set up a MIRO board that displays a character that each of you needs to annotate with answers to specific questions. Try to complete these diagrams with information from your own research and not the Topic Overview <3

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by Mihaela Chiujdea (RO)