Debate surrounding the European Commission’s proposal to extend the scope of the EU’s Carbon Border Adjustment Mechanism (CBAM) to downstream sectors is heating up, as European machining and equipment manufacturing association VDMA calls for the complete abolition of the carbon leakage instrument.
Outlining the “insurmountable bureaucratic challenges” CBAM presents for European industrial SMEs, the VDMA highlights a yearly labour decline of 2.6% in the German plant and engineering industry in evidencing the sectors’ woes, attributing the losses to difficult business conditions as a result of EU overregulation and Chinese import pressure.
As such, across various press releases and a media op-ed, the VDMA calls for the “entire CBAM mechanism to be abolished or at least fundamentally revised,” further arguing that “the plans to extend [CBAM] to additional industrially processed products must be stopped.”
Citing a recent members survey, the association states that “76% of machinery and plant engineering companies receive reliable emissions data from less than 10% of third country suppliers. As a result, companies are forced to use [default values] for over 90% of their CBAM declarations.”
“Collecting verified, product specific emissions data for these inputs has proven extremely difficult in practice and sometimes impossible,” it said. “Suppliers often lack the technical capacity, data infrastructure or regulatory incentives to provide emissions data in line with EU requirements.”
The industry body claims that as a result of anticipated verification frictions and the consequent use of default values, the machinery sector will have to purchase up to 30% more CBAM certificates than other sectors “where access to emissions data is easier,” opening European manufacturing to inflationary cost risk and substitutive import pressures beyond what industry can absorb. According to the VDMA, “the limits of tolerance have been reached” – 40% of its survey respondents are reportedly considering relocating operations out of the EU due to CBAM, with over a third expecting to suffer labour cuts.
CBAM entered its definitive stage in January, imposing carbon costs on in-scope imports in line with what the relevant producer would owe if operating under the EU’s Emissions Trading System (ETS). This is to prevent “carbon leakage” – the relocation of the EU’s domestic industry to foreign jurisdictions with less burdensome climate costs – and as such targets energy-intensive industries, like the steel sector, in balancing operating costs (and market price) between domestic and international producers.
However, the consumers of these energy-intensive goods remain relatively unprotected – be it via trade or climate protections – from substitutive imports of finished components. There is therefore growing concern among industrial players that downstream manufacturing sectors consuming CBAM goods could face potentially existential price inflation in their supply chains, further undermining downstream competitiveness in both their domestic and international markets.
Anticipating this risk of deflecting carbon leakage downstream, the European Commission proposed to extend the scope of CBAM to downstream goods in December, with 180 CN codes selected for extension on the basis of statistical modelling of carbon leakage risks. Contrary to the VDMA’s position, many in the steel supply chain have criticised the proposed scope as insufficient (including representatives from non-included downstream sectors), and seek a broader application, either via modelling adjustments or qualitative CN code inclusions.
But CBAM is not the only factor behind fears of unmanageable upstream price inflation; the EU’s long-term replacement of its steel safeguard system – expected to be implemented for July when current protections lapse – commits to approximately halving duty-free steel import volumes, and introduces a doubling of the tariff rate to 50%, a level most importers are completely unable to accommodate on their books if forced to pay out-of-quota duties.
Upstream steel prices thus look poised to increase further as regulatory restrictions bite international supply to the EU. McCloskey’s research team forecasts higher European steel prices later this year despite a fragile demand outlook, expecting higher costs to impact “both industrial steel end-users and final consumers.”
Sounding the alarm, European steel trade and distribution association EUROMETAL last week spearheaded a campaign – now exceeding 400 signatories across the EU’s steel supply chain – calling on European authorities to immediately extend the scope of tariff-rate quota and CBAM instruments to downstream steel-consuming products (exhaustively, across CN headings 73-95) as an urgent priority, preferring a remedy of “Trumpish” pace to the EU’s traditional bureaucracy.
European steelmakers association EUROFER is also understood to be operating behind the scenes, mapping steel and steel derivative CN codes as a baseline from which to support a swift downstream extension of the EU’s new steel trade protection framework.
Last week, automotive sources told McCloskey that any effective extension of trade or climate protections to downstream goods would have to be “exhaustive” and “intense,” as substitutive component imports can already access the EU at ultra-competitive margins of 30% or higher, rife with circumvention loopholes.
The VDMA’s policy preferences would instead see CBAM “abolished as a failed instrument,” but accepting the unlikelihood of a total withdrawal, the association instead calls for: an “immediate halt” to downstream extensions; a “robust” export solution; “realistic,” non-punitive default values; and “a significant reduction” to administrative burdens on European operators.
The latest Rapporteur draft reports – produced to guide compromises during the EU’s trilogue legislative negotiations between the European Parliament, the EU Council and the European Commission – on both the CBAM downstream extension and Temporary Decarbonisation Fund (TDF) proposals would seem to address at least some of the VDMA’s demands, suggesting to extend TDF grants for access by downstream operators, and to link issued funds more directly to export productions. Downstream CBAM goods would also have punitive mark-ups removed when using default values due to mitigate the complexity of downstream supply chains, but given the scale of some steel default values on a per ton basis, it is unlikely that the removal of a 10-30% mark-up would do much to alleviate the VDMA’s concerns.
Author: Benjamin Steven
