The European Union (EU) has several policies in place to address issues such as meeting climate goals. One of these measures is the pricing of CO2 emissions through the EU Emissions Trading Scheme (EU ETS). This system was established in 2005 to encourage companies to become more sustainable through pricing. It is a measure that has been welcomed by industry and so far appears to be working well.
Because CO2 prices are not universally applied, companies that do fall under such a scheme experience a competitive disadvantage. Therefore, many of the sectors covered by the EU ETS currently still receive free allowances to remain competitive with comparable producers in many non-European countries. Some sectors simply take longer to become sustainable than others. Yet the European Commission (EC) wants to get rid of these free allowances, and with the Carbon Border Adjustment Mechanism (CBAM), has come up with a measure to maintain the level playing field and counter leakage risks.
The CBAM imposes a levy on the cost price of goods, thereby also pricing in emissions released from production outside the EU. This includes several product groups, namely iron and steel, fertilizers, cement, aluminum, electricity and hydrogen. CBAM has been introduced in three phases to replace these free allowances, while phasing them out. As the share of free allowances decreases, the cost of CO2 emissions increases. The CBAM scheme applies to importers of CBAM goods produced outside the EU. As a result, products not produced in the EU are priced for emissions just as much as European goods consumed within the EU.
Where at its base CBAM is a good idea to implement a tariff on goods produced outside the EU, thereby protecting European industry and at the same time extending the positive impact of European climate policy to global climate policy, there are also areas for improvement. For example, CBAM focuses only on imports of commodities covered by the levy into the EU and does not consider exports. It also does not take into account the fact that the cost price calculation for a product produced outside the EU is different from one produced within the EU. Furthermore, it charges a levy on raw materials, but not on products imported that already incorporate these raw materials. We describe these and some other shortcomings in this report.
Finally, we come up with some recommendations that would improve the functioning of the CBAM and keep the actual goal - a level global playing field for European producers as well as encouraging sustainability through pricing - intact.
