The European Commission considers the risk of trade retaliation to be a key challenge to its proposed implementation by 2023 of a European Union carbon border adjustment mechanism (CBAM) for selected sectors including steel, even though the tax is aimed to be an “important element of climate diplomacy”, a Commission official said on a market webinar organized by European steel distributors’ association EUROMETAL Nov. 20.
Other challenges include the technicalities of calculating the carbon content of products, how to “balance the burden” between EU and non-EU companies and align the system with the EU Emissions Trading System, at the same time as ensuring the competitiveness of EU industry on global markets and contributing to the decarbonization of strategic sectors including steel, said David Boublil, EC director general, taxation and customs union.
“We should really respect World Trade Organisation rules and need to be aware of the risk of trade retaliation…the tax must be implemented in a way to strengthen global climate ambition…and encourage use of less carbon-intensive technologies in partner countries,” he said. However, if a tax is not introduced “EU products will be replaced by dirtier products from abroad,” he said, noting that the risk of carbon leakage (companies shifting production to locations where environmental regulations are more lenient) is increasing.
Plans to introduce CBAM have been announced under the auspices of the EU’s “Green Deal” growth strategy, which aims to address the challenge of the EU becoming carbon neutral by 2050. Already under discussion for ten years, the CBAM continues under consultation with trade, industry and a variety of entities both within and outside the EU. A proposal for the tax system – of which the steel industry may be one of the major beneficiaries – is to be made in Spring 2021, when a “green taxation event” will also take place, Boublil told the steel sector representatives attending the webinar.
Adoption of the mechanism is foreseen for June 2021, and it should be in place by 2023, Boublil said.
CBAM options under consideration include its implementation via a simple import tax, an extension of the ETS on imports, a notional ETS and a consumption tax, of an excise or VAT type, on both imported and domestic goods, that would reinforce carbon pricing, he said.
Options for defining the scope of emissions being embraced under the CBAM include direct and indirect production emissions; the complete value chain; differentiation between finished, intermediary and basic products and covering international transport of goods, Boublil said.
The idea of implementing the tax via an export rebate “is challenging from a World Trade Organisation perspective,” he said. Implementation via the distribution of free ETS allowances within the EU may also be problematic, Boubil indicated, adding that stakeholders have expressed some apprehension that the tax could increase the cost of business, lead to higher product prices and impact employment in the EU.
“The challenge is to design a measure that has the best possible economic and environmental impacts, the design is very important, what emissions are covered and how we account for the carbon,” the EC director said. The Commission will take a sectoral approach to the CBAM’s introduction and take full account of the ETS, which is to be revised, he said.
— Diana Kinch