EU Green Deal (carbon border adjustment mechanism)

Published initiative by European Commission. Further information: European Commission.

The Commission will propose a Carbon Border Adjustment Mechanism (CBAM) for selected industrial sectors by June 2021 as part of the European Green deal. EK has strong reservation and highlights the need to make a clear assessment of CBAM’s disadvantages and benefits. It is an instrument that is politically very risky, complicated, and costly to implement. The EU already has well-functioning tools against the risk of carbon leakage in the EU Emissions Trading Scheme (EU ETS), like free allocation and indirect compensation. We strongly oppose the Commission’s initial idea of replacing these measures with a CBAM.

Confederation of Finnish Industries EK represents private sector (services and industries), has 24 member associations and 15,300 member companies. We speak for employers of all sizes, from public limited companies to SMEs. Our member companies create jobs and welfare in Finland and are responsible for 2/3 of Finland’s export of goods and 2/3 of Finland’s R&D expenditure.

We appreciate a possibility to deliver views of Finnish businesses regarding a Carbon Border Adjustment Mechanism.

Carbon Border Adjustment Mechanism – a highly sensitive measure

The Commission will propose a Carbon Border Adjustment Mechanism (CBAM) for selected industrial sectors by June 2021 as part of the European Green deal.

EK has strong reservation and highlights the need to make a clear assessment of CBAM’s disadvantages and benefits. It is an instrument that is politically very risky, complicated, and costly to implement and should be considered only in the most extreme cases where other options for finding a common solution have been exhausted. It is utmost important to use sufficiently time to both impact assessment and coming implementation phase to avoid hasty solution.

The EU already has well-functioning tools against the risk of carbon leakage in the EU Emissions Trading Scheme (EU ETS), like free allocation and indirect compensation. We strongly oppose the Commission’s initial idea of replacing these measures with a CBAM.

CBAM’s are politically risky, complicated, and costly to implement

EK supports 55% GHG emissions reduction target for 2030 and climate neutrality target for 2050 in the EU. We see that the EU ETS is an effective tool to reduce GHG emissions in energy production and industry and it must remain as a main instrument for these sectors.

Carbon pricing continues to gain traction globally as a cost-efficient tool for emissions reductions. However, progress is too slow in Europe’s main trading partners making the risk of carbon leakage a reality. We support Commission’s efforts to assess different options to minimize the risk on carbon leakage. At the same time, the current and mostly well-functioning measures like free allocation and indirect compensation in the EU ETS need to be continued and not be replaced by a CBAM. Uncertainty about the level of these ETS carbon leakage measures in the future is detrimental to investment decisions among ETS companies.

Before the EU should move ahead with a CBAM, there needs to be a comprehensive impact assessment. A detailed analysis should include the practical feasibility, legal aspects, impact on the ETS and downstream sectors, as well as risk of retaliation. The functionality and compatibility with the EU ETS need to be carefully assessed to avoid any disruption, especially in the options in which ETS allowances would be used as a CBAM for import goods. If the impact assessment shows that a CBAM is not a good tool to prevent carbon leakage or mitigate climate change, the EU needs to adapt its plans accordingly.

Designing of a CBAM will be politically challenging and subject to many uncertainties. It is currently extremely difficult to determine the carbon footprint of different products limiting the possibilities of a CBAM.

CBAM would also entail additional costs that could hamper the competitiveness of the EU export industry. What is more, the carbon border adjustment would not benefit EU companies operating in third markets.

Major trade policy risks are also associated with the carbon border adjustment mechanism. The unilateral introduction of a new CBAM tool would most likely lead to retaliatory measures especially from the EU’s biggest trade partners. It is also uncertain whether it is possible to find a CBAM, which would be compatible with WTO rules making the risk of countermeasures by our trading partner even greater. If the EU decides to move with measures that would be clearly against the WTO rules, it would be another major hit for multilateral rules-based trading system.