A Carbon Border Adjustment Mechanism (CBAM) has been proposed by the European Commission as an alternative to the measures under the EU ETS that currently address the risk of carbon-intensive industries relocating to countries with no carbon pricing (carbon leakage), such as the free allocation of emission allowances.

Free allocation creates obstacles to decarbonisation, to innovation and to the good functioning of the carbon market. This is why it is urgent to replace this mechanism with the CBAM.

One of the main arguments of some industry lobbies that oppose a faster CBAM is that there is a risk of decreasing competitiveness for EU exports. As goods made in the EU pay the carbon price and extra-EU goods will pay the CBAM, there’s no risk for competitiveness distortion inside the Internal market. However, for exported goods, if EU producers have to pay a carbon price, this would decrease their competitiveness in foreign markets where there is no carbon price or other measure penalizing polluting processes.

Carbon pricing must not cause carbon leakage for that EU production which is destined for export to countries that do not have a carbon pricing mechanism in place. Of the three currently tabled institutional proposals, only the Parliament seriously addresses this issue by ensuring that production destined for export to those third countries will continue to receive free allowances.

The Commission ruled out export rebates in its CBAM impact assessment in July 2021 due to WTO compliance concerns. Some argue that there are ways to design export rebates in a WTO compatible manner, but even so, there is resistance against a measure that could trigger hostile reactions from trade partners before a WTO verdict is issued. The bottom line is that a negotiated approach with our partners is preferred.

As this approach will take time, most parties conclude that export rebates will have to be proposed after the CBAM’s review period, in 2026 (this is the ‘review clause’ option). However, the CBAM’s implementation timeframe is being decided now. If rebates can apply as soon as 2026, CBAM implementation should be moved forward too. It is therefore important, in a review clause scenario, to allow for an acceleration of the CBAM if a satisfactory solution is found for export rebates.

A faster CBAM could free up more than 1.5bln emission allowances that are currently given to industry between 2024 and 2030. At €100 per allowance, this would generate €150bn in additional revenue for Member States and EU budgets while the resulting undistorted carbon price will set incentives for decarbonisation.  Charging for these free allowances that are currently given to polluting installations could finance 71% of the entire REPowerEU proposal 2021-2027[1].

[1] Financing REPowerEU (European Commission, 2022)

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