Carbon border adjustment cannot create fully level playing field for EU industry – report

A European CO2 border adjustment payment can be a first step towards a fairer competition environment regarding emission costs but not accounting for indirect emissions means that a level playing field is not created yet, researchers from the Institute of Energy Economics at the University of Cologne (EWI) write in a policy briefing. According to the European Commission’s current Carbon Border Adjustment Mechanism (CBAM) proposal, importers of aluminium, fertiliser, steel, iron, cement and electricity would have to pay at the EU border to make up for the CO2 costs that the production of similar products incur in Europe, but not for the indirect emissions, for example from the generation of electricity, heat or gas which is then used during the production process. European producers do, however, bear these costs, for example through the Emissions Trading System (EU ETS) and in the future will probably no longer receive freely allocated CO2 allowances via the “carbon leakage list,” the EWI writes. "Not taking indirect emissions into account in the EU-CBAM leads to distortions of competition and could weaken the international competitiveness of EU producers," said senior research consultant Eren Çam, who wrote the policy brief together with Lisa Just and Patricia Wild. The EWI researchers found that producers in Russia, Turkey and Ukraine, especially in the steel and iron industries, are expected to be most affected by the CBAM as they have high import volumes and no or a low CO2 price.

The European Union is taking steps towards introducing a carbon border adjustment mechanism, an instrument that has been hailed as a stimulus for climate action but also branded as a way to spark new trade wars between the bloc and its trading partners. As the EU is pursuing a higher climate-neutrality target and a green overhaul of its entire economy, the mechanism that has importers pay if their product has a higher carbon footprint than their European counterparts leaves many industries and non-EU governments concerned.