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CBAM – another EU acronym to rule them all?

Kevin Le Merle / Oct 2023

European Commissioner Paolo Gentiloni at the launch of CBAM, July 2021. Photo: European Union, 2023

 

The Carbon Border Adjustment Mechanism (CBAM) has entered its transitional phase as of October 1st – offering a good opportunity to scrutinize what its implementation entails for climate justice.

The long-standing CBAM debate

Despite the EU defining its CBAM as a trade instrument that encourages a cleaner production of goods in other countries and puts a fair price on carbon emissions, it attracted significant criticism when it was proposed in 2021. After the transitional phase, the current legislation requires importers of the covered sectors of cement, iron & steel, aluminium, fertilisers, electricity, and hydrogen to purchase and deliver certificates corresponding to the embedded emissions of the products they plan to sell on the EU market. In sum, importers will bear the cost of selling highly emitting goods in the EU, and pass this cost on to non-EU producers.

The debate around CBAM has long been torn between pundits stating the policy needed to cover all sectors and emissions scopes, in order to avoid market distortions and effectively cover carbon-leakage, to those that underlined the EU should have favoured a consumption-based levy to avoid displacing the costs of climate action onto climate vulnerable countries.

Geopolitical dimensions of the EU CBAM

Some stressed the policy had the potential of creating positive knock-on effects down supply chains that would help the world decarbonize faster. In essence, the CBAM would act as a strong geopolitical signal. Others, emphasized the risk of the policy backfiring with the daunting possibility of reverse and consumption leakage, whereby the supply chain effects of CBAM increase rather than decrease emissions.  Experts even emphasized the lack of evidence suggesting carbon leakage would even occur in the first place. Many deplored the EU’s lack of consultation with trade partners ahead of the proposal being issued and making it through the consecutive legislative steps.

Yet, CBAM remains a bold step towards internalizing the cost of carbon world-wide, making it clear that it would be reductive to simply discredit it. Whether we like it or not, the policy is here to stay. The question is now how to ensure its implementation does not backfire. Indeed, it runs the risks of shoring up anti-EU sentiment either from countries like India, which are significant trade partners for the EU, or from climate vulnerable countries like Mozambique, expected to be worst hit by the measure. Since the heightened tensions surrounding the war in Ukraine, the risk of backlash from CBAM also comes with its own geopolitical fallout for the EU’s climate diplomacy, and risks being the straw that breaks the camel’s back.

CBAM revenue and the EU’s international commitments

This question is thoroughly intertwined with the issue of the revenues being generated by CBAM. While 25% are planned for collection costs of Member States – to cover the administrative burden of implementing CBAM, 75% are expected to flow to the EU’s own budget. A commission official flagged that the use of this own budget still could be used for funding to limit the regressive social impacts of the green industrial transformation. This however signals that the EU’s CBAM would primarily serve its domestic just transition agenda at best, with little regard for enabling a global just transition.

In brief, the EU would benefit from the pollution of the rest of the world, at the very least in the short-term. If this were to be the case, it would stand in stark contrast to the EU’s international commitments to spearheading climate justice. In a way, the road to the implementation of CBAM might reveal the tensions between the EU’s stubborn defense of the multilateral trade system in its current form of the buffeted WTO rules, and the EU’s sign on to the Common But Differentiated Responsibility clause of the Paris Agreement. The CBAM appears to be in an impasse, which either require WTO reform for increased environmental and social policy space, or a blatant disrespect of the ethos of the Polluter Pays and Ability to Pay principles on the international level.

A way forward?

In a situation of heightened geopolitical fluctuations, this could risk jeopardizing the EU’s credibility on climate action. Careful steps would be warranted, notably seeking further coherence between the EU’s development, trade, and climate agendas. This would be an essential element for the implementation of CBAM to be fit for the increasingly geopolitical imperatives of climate justice. For the EU’s practice to align with its rhetoric, the revenue generated by CBAM should be used for climate action. More specifically, the only moral avenue that remains open is for the revenue of CBAM to equip the countries facing the worst climate damages with both the financing and capacity to cope with the already unfolding crisis.

Kevin Le Merle

Kevin Le Merle

October 2023

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