Bruegel, a European think tank specializing in economics, convened an online event to assess trade and environmental implications of the proposed Carbon Border Adjustment Mechanism (CBAM) in the EU. Participants acknowledged that while it is possible to design a mechanism compatible with the World Trade Organization (WTO), “politics will be essential.”

The event was held on 4 February 2021, on the theme, ‘Carbon Border Adjustment Mechanism: Greening the EU trade?’ André Sapir, Senior Fellow, Bruegel, moderated the discussion.

Introducing the topic, Sapir highlighted the EU’s target to reduce its carbon emissions by 55% by 2030 compared to 1990 levels, noting it will require a much higher price for carbon emissions. He said in June, the European Commission is expected to unveil a proposal for a CBAM, designed to protect the EU against distortion of competition and the risk of carbon leakage. While the CBAM aims to help the EU and global trade become greener, Sapir recognized concerns that possible unfair advantage and “European protectionism” will further damage an “already shaky” multilateral trading system (MTS).

We need to move the world to a non-voluntary system with some bite.

Luis Garicano, Member of the European Parliament and Vice President of the Renew Europe, presented a proposal for the design of a CBAM that would prevent carbon leakage and protect the climate. He said the CBAM would:

• Mirror the price being charged to EU producers to ensure fairness and non-discrimination;
• Avoid importers paying twice for their carbon content to incentivize the development of new carbon pricing schemes in third countries; and
• Allow importers to demonstrate their real carbon emission levels to incentivize decarbonization investments in third countries.

Garicano said the CBAM should be based on the EU Emissions Trading System (ETS), be compatible with World Trade Organization (WTO) rules, and avoid discrimination between domestic producers and foreign importers. He said the mechanism would benefit from stronger public support.

Emily Lydgate, Senior Lecturer, University of Sussex, hoped for a “proactive approach” from the UK government in its discussions with the EU on carbon border adjustment. Regarding the proposal, she said an appeal mechanism could help ensure that consumers get better rates. Lydgate cautioned that adjusting details reintroduces technical complexity and that changes in ETS prices make it challenging to assess compliance.

Suman Bery, Non-resident Fellow, Bruegel, underscored that the global consensus around the Paris Agreement on climate change is based on voluntary nationally determined contributions (NDCs). He said for the EU to judge the level of ambition is “presumptuous,” and noted technology transfer among elements absent from the CBAM proposal. Bery stressed the need to balance most-favored-nation treatment, the non-discrimination principle, and the common but differentiated responsibilities (CBDR) principle under the UNFCCC. Noting that the WTO is “under terrific stress,” he called for a discussion on “collateral damage.”

Garicano said we need to move the world to “a non-voluntary system with some bite” since, like the WTO, climate is under “gigantic” stress. “If there is a real climate crisis,” he said, “there is a cost we need to incur.”

Bery questioned whether access to EU market is a sufficient incentive to ensure green growth in the global South.

Lydgate suggested there could be exemptions applied to developing countries, but cautioned that it will be difficult to eliminate politics from CBAM discussions.

Sapir recommended that the European Commission engage in immediate discussions with trade partners on the CBAM and any potential tradeoffs, including in the WTO’s Committee on Trade and Environment (CTE). [Event Webpage] [SDG Knowledge Hub Story on EU’s Green Deal] [SDG Knowledge Hub Sources]