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CO2 Border Adjustment Mechanism

In mid-July 2021, the European Commission presented draft legislation for a carbon border adjustment mechanism (CBAM). The aim is to keep EU companies, which must face higher climate protection requirements as a result of the tightening of climate targets, competitive. Thereby is carbon leakage to be prevented. The BDI, whose members have strong concerns about such a mechanism, is critical of the planned measure. 

The Commission has proposed a CBAM for selected sectors to reduce the risk of carbon leakage with the justification, that the price of imports should better reflect their CO2 content. This measure is designed to be in line with World Trade Organisation (WTO) rules and other international commitments of the EU, the Commission said. However, according to the Commission, it would initially be a complement to the measures that have so far mitigated the carbon leakage risk in the EU ETS (free allocation, electricity price compensation). The instrument of CO2 border adjustment is new and has not yet been tested in any way. For this reason, a three-year transition phase is to precede the launch of the instrument in January 2026. However, the European Commission's current proposal still needs to be specified and concretised in many respects before it can enter the test phase. From the BDI point of view, border adjustment measures cannot replace free allocation and electricity price compensation – as indicated by the Commission – but rather should serve only as a complement. 

It is not yet possible to say how the new German federal government will act. In the 19th legislative period, CBAM was seen with a wait-and-see outlook. However, France took over the European Council presidency for six months in January 2022 and it is certain they will push the dossier. To date, however, no clear direction can be discerned in the Council. Many EU Member States are still in the process of analysing the proposal in greater depth and forming an opinion.  

Carbon Leakage Protection Needed 

The BDI supports the Paris climate goals and the objectives of the European Green Deal. The CBAM should in principle be examined for its suitability to mitigate carbon leakage risk, as the amount of allowances for free allocation will continue to decrease. As long as not all countries are willing or able to reduce their greenhouse gas emissions as ambitiously as the EU, this risk exists. In climate protection, the ambition gap with competitors is growing. If companies in the EU (must) realise more climate protection than elsewhere, this means more of a burden than elsewhere. Therefore, extended carbon leakage protection is absolutely necessary. 

However, the shift to low-carbon production technologies cannot happen overnight. Ensuring a level playing field as well as competitive neutrality remains a priority for the BDI, as European companies can only achieve the ambitious climate targets if they are economically successful.  

Border Adjustment Measures must be WTO-Compatible

There is a serious fear that the unilateral introduction of CBAM will lead to harsh backlash from key trading partners, including WTO disputes or tariff retaliation coupled with accusation of protectionism. Circumvention of the CBAM levy through modified export variants is also an aspect of great concern. The Commission proposal remains very vague on how this circumvention is to be avoided. Border adjustment measures must be WTO-compatible, especially with regard to the most-favoured-nation principle and national treatment, and their use must be internationally coordinated.  

The BDI advocates a sectoral step-by-step approach with an upstream test phase and a focus on direct (Scope 1) emissions. This will prevent the existing and proven instruments for the protection of carbon leakage from being undermined. Stable framework conditions and legal certainty are indispensable. Against this background, protection against carbon leakage until 2030 should primarily be provided by the traditional instruments, free allocation and electricity price compensation, without any cutbacks. 

Moreover, CBAM is anything but a miracle cure for carbon leakage. It is an instrument with which we have no experience whatsoever in the climate sector. At best, it can provide additional protection for individual sectors, but possibly with considerable side effects, such as retaliatory measures and resulting trade conflicts. Additional measures against carbon leakage are therefore still to come. CBAM should be tried out cautiously, if at all, and only applied in constructive cooperation with trading partners who are also interested in this instrument. One thing is clear: successful climate protection requires international cooperation. Trade conflicts are only damaging for the climate.