Following the agreement on the EU’s new external carbon tariff CBAM, Ron Stoop, a Dutch political economist, takes a closer look at this new “Carbon Border Adjustment Mechanism”.
He writes: “The Carbon Border Adjustment Mechanism (CBAM) is a new EU law that attempts to protect low-carbon production in Europe against ‘dirty imports’, which are often cheaper due to little regard for the environmental impact. Initially, the CBAM will apply to electricity, cement, steel, fertilizer, aluminum and hydrogen, and in 2030 to all sectors included in the EU Emissions Trading System (ETS).
CBAM’s transition period, from October 2023 to 2025, initially only includes reporting obligations: Importers must report ’embedded emissions’ from the imported products from 2023. The next step will begin in 2026, requiring importers to purchase CBAM certificates, with costs gradually increasing until fully charged in 2034.
In eerste instantie zal het CBAM van toepassing zijn op elektriciteit, cement, staal, kunstmest, aluminium en waterstof, en in 2030 op alle sectoren die in het EU emissiehandelssysteem (ETS) zitten. /3. https://t.co/7EL3kXt4oV
— Ron Stoop (@RonStoop1) October 29, 2023
“The price of CBAM certificates will correspond to the weekly prices of the EU ETS market. The idea is that exporters pay just as much CO2 tax as companies within Europe. However, exporters can deduct the CO2 taxes paid in their own country from the CBAM obligation. This encourages other countries to introduce a CO2 tax themselves.”
He warns: “The impact of CBAM could easily be enormous: many countries are now preparing for the potential effects of CBAM. The CBAM will dramatically change global trade as CO2 becomes a new cost driver. This will lead to new trade flows as higher EU prices will direct exports elsewhere.”
As with regards to the actual economic costs and effects:
“The effects are not gentle: the CBAM can increase the steel price for an exporter like India by 20 to 30 percent. For example, the introduction of the CBAM by the EU could affect the steel industry in Latin America. There are concerns that ‘dumping practices’ will take place of the ‘dirty steel’ that no longer enters the EU.
In fact, CBAM could increase steel exports to Latin America, especially from China, which has already increased its exports to the region.”
He adds that “the UK is also concerned about such ‘dumping’ and is considering making its own type of CBAM. There is now also a proposal in the US (from the Republicans, no less) to introduce an American CBAM-like system.”
He thereby concludes:
“The CBAM is expected to generate more than $9 billion annually for EU member states by 2030. We’ll probably have to wait a few more years to see the actual effects, but for now the impact seems to be quite significant. This brings us one step closer to global CO2 pricing.”
Brussels-based anti-trust lawyer Thomas Harbor has furthermore pointed out that CBAM is not the only new tool, saying that “The EU is beefing up its defensive trade policy toolkit, which encompasses tools from #CBAM to the Anti-Coercion Instrument or the Foreign Subsidies Regulation.”
— Thomas Harbor (@th_harbor) May 11, 2022