Urgent: CBAM needed to abolish free allocation under the EU ETS
Why was the CBAM proposed in the first place?
In July 2021, the EU announced its Fit for 55 package – a sweeping set of climate and energy policy proposals which forms the EU’s approach to combat the effects of climate change. This package is the EU’s toolkit for meeting its target of at least 55% emissions reductions, compared to 1990 levels, by 2030, and its long-term target of becoming climate neutral by 2050. Under the Fit for 55 package, the European Commission has proposed the CBAM – Carbon Border Adjustment Mechanism – as the EU’s instrument to combat the risk of so-called ‘carbon leakage’ (occurring if businesses were to transfer production to countries with laxer climate policies regarding emissions constraints) which can shift emissions outside of Europe and, in turn, undermine EU and global efforts to tackle the climate crisis. It is a mechanism for imports of goods from outside the EU placing a fair price on the carbon emitted during production. The CBAM should also encourage lower, or zero carbon technologies to be used in industry in non-EU countries. Additionally, the package also proposes a reform of the ETS – the EU’s Emissions Trading System, the cornerstone of the package which addresses climate change by reducing greenhouse gas emissions. This is a good step, however, the proposal still includes provision for too much free allocation as part of its measures.
Free allocation must stop now
As our research has shown for a long time, the free allocation of emissions allowances to industry is a major obstacle to industrial decarbonisation, and should be replaced urgently by a better system. Since it is the main instrument to replace free allocation, the CBAM must be implemented much faster than is proposed in the regulation. Indeed, the proposed regulation for a CBAM states that there will be a three year reporting only period and that the mechanism will only be fully implemented by 2035 years, at odds with the urgency of the free allocation problem. If free allocation is phased out more quickly, this will ensure there is equal opportunity for industry players, and minimise unfair competition as eligibility to free allowances is always limited to plants covered by the EU ETS, above a certain size, to the detriment of other or smaller, low-carbon ones. Our research has shown that the CBAM would neither significantly affect profitability for producers nor importers of goods covered by it.
From the perspective of climate ambition, the most efficient use of the CBAM will be if it fully replaces free allocation. This will ensure that the EU can meet its emissions reductions targets as well as contributing to keeping ‘1.5 alive’, under the UN Paris Agreement.
So, what are our policy demands for the CBAM?
We have identified, based on our research, the following demands to the European Commission to ensure industrial decarbonisation:
- An immediate phase out of free allocation directly after which the CBAM should be implemented in its place, rather than the proposed 13 year transition period (2023 to 2035).
- If it is not viable to implement the CBAM faster than is proposed (and therefore phase out free allocation), the European Commission must propose an alternative solution in order to stop free allocation as soon as possible.