Last week, the European Commission took a major step to implement the climate aspects of its European Green Deal.  It presented a proposal for a European Climate Law and two consultations on its announced Climate Pact and Carbon Border Adjustment Mechanism (“CBAM”).

The European Commission intends to present a proposal for a CBAM by the summer of 2021.  The consultation (currently first as a so-called “feedback period”) on the CBAM is intended to allow stakeholders to give their views on the different aspects of the possible mechanism discussed in the Commission’s Inception Impact Assessment.

The idea of a CBAM has been considered in the EU and elsewhere for many years.  As the argument goes, the need for such an adjustment is based on the reasoning that European trade-exposed energy-intensive industries that are subject to the EU’s Emissions Trading System (“ETS”) and other EU climate standards are at a disadvantage against foreign producers that are not subject to similar emission reduction requirements.  This, in turn, results in foreign producers increasing their emissions despite European industries’ efforts, i.e. so-called “carbon leakage.”

The European Commission’s proposed goal that the EU achieves climate neutrality by 2050 has reinforced the position of those advocating for the need to adopt a CBAM.  Supporters of the CBAM claim that it will ensure that all goods consumed in the EU/EEA, whether imported or produced domestically, are treated the same way and encourage other countries across the world to also decarbonize.  In line with this, in its Communication on an European Green Deal of December 2019, the Commission announced that “should differences in levels of ambition worldwide persist, as the EU increases its climate ambition, the Commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage.  This would ensure that the price of imports reflect more accurately their carbon content.”

In its Inception Impact Assessment, the Commission reiterates this position and states that “[a]s long as many international partners do not share the same climate ambition as the EU, there is a risk of carbon leakage.”  The Inception Impact Assessment also states that the mechanism “would ensure that the price of imports reflect more accurately their carbon content.  The measure would need to be designed to comply with World Trade Organization rules and other international obligations of the EU.”  Not surprisingly, it also states that the mechanism “would be an alternative to the measures that currently address the risk of carbon leakage under the EU ETS.”  Indeed, the introduction of a carbon adjustment mechanism would likely mean that industries covered by the mechanism would no longer benefit from free allowances under the EU ETS.

The Inception Impact Assessment also clarifies that the development of a CBAM would be based on three building blocks: (i) a legal instrument, which could for example include a carbon tax on selected products, a new carbon customs duty or tax on imports, or the extension of the EU ETS to imports; (ii) a methodological approach to evaluate the carbon content and carbon pricing of imported products; and (iii) a possible limitation of the Mechanism to only some industrial sectors (e.g., cement).

The Commission’s consultation on the CBAM raises important climate, international trade, development, and economic issues.  To list but a few:

  • Should the adjustment mechanism target specific industries (g., cement, aluminum, steel, or chemicals), or instead apply horizontally across all industrial production? A prudent approach would be that considered by the Commission and to initially focus on one or two sectors, as pilot projects, such as cement.  Introducing the CBAM from the start to all industrial sectors is likely to increase the risk of legal challenges. Based on the experiences gained with the selected pilot projects, the EU could later decide whether, and under what terms, to extend the CBAM to other sectors.
  • How will the EU be able to develop an objective methodology to calculate the carbon footprint of a product? This is the key question for the viability of the CBAM.  Before adopting any mechanism, it should be clarified how the EU will be able to get reliable and verifiable information on the carbon footprint of the products produced in third countries. There is a major risk that third countries may either not cooperate and not provide any data, or even if they do cooperate, provide data that it is not reliable.  In order to limit the risks of legal challenges, the EU should have a clear idea on how to deal with lack of reliable data from third countries before it takes any steps to introduce the CBAM.
  • Moreover, even if reliable data can be obtained from third countries, the EU should consider how to deal with situations where two identical or similar products have different levels of carbon footprint due to their different production methods and technologies.  Should the EU in such cases apply a different border tax or levy? And how could such different treatment on identical or similar products be compatible with WTO law?
  • To what extent should the existence of an emissions trading scheme similar to the EU’s ETS in the product’s country-of-origin exempt the imported product from any border adjustment? To which minimum standards should these non-EU emissions trading schemes be subject?  As a related question, would there be some kind of “de minimis” level of carbon footprint, below which the border tax would not be applied? Would there be differentiation among WTO countries, g., accepting a higher level of non-actionable “de minimis” level from a defined group of (small or vulnerable) developing countries?
  • What design should the CBAM have to also ensure the EU’s compliance with its international obligations under multilateral environmental agreements that call for “common but differentiated responsibilities” in the fight against climate change?

Interested parties may submit comments until April 1, 2020.

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Photo of Péter Balás Péter Balás

Ambassador Péter Balás, a non-lawyer, is a senior policy advisor and member of Covington’s Public Policy team. He draws on over 40 years of experience in the field of European and international politics and trade to advise clients on policy related issues.…

Ambassador Péter Balás, a non-lawyer, is a senior policy advisor and member of Covington’s Public Policy team. He draws on over 40 years of experience in the field of European and international politics and trade to advise clients on policy related issues.

Most recently, Ambassador Balás held the positions of Deputy Director General, DG Trade to the European Commission (2005-2014) and Head of the Support Group for the Ukraine in the European Commission (2014-2015). He was previously Ambassador and Permanent Representative of Hungary to the World Trade Organisation.

Ambassador Balás has also held several positions working for the Hungarian Government, including as Deputy State Secretary for International Economic Relations at the Ministries of Economic Affairs (1996-2000) and Foreign Affairs (2000-2002); Assistant State Secretary in the Ministry of Industry and Trade (1994-1996), and Director-General in the Ministry of International Economic Relations in Budapest (1991-1994).

As part of Covington’s global public policy team, Ambassador Balás is part of a market leading group of experienced lawyers and other former senior policymakers. The team advises clients on a range of European public policy issues, including the EU policy-making processes and the functioning of the European institutions.

Photo of Cándido García Molyneux Cándido García Molyneux

Cándido García Molyneux is a Spanish of counsel in the Brussels office of Covington & Burling.  His practice focuses on EU environmental law, renewable energies, and international trade law.  He advises clients on legal issues concerning environmental product regulation, emissions trading, renewable energies…

Cándido García Molyneux is a Spanish of counsel in the Brussels office of Covington & Burling.  His practice focuses on EU environmental law, renewable energies, and international trade law.  He advises clients on legal issues concerning environmental product regulation, emissions trading, renewable energies, energy efficiency, shale gas, chemical law, product safety, waste management, and international trade law and non-tariff trade barriers.  Mr. García Molyneux was very much involved in the legislative process that led to the revision and amendment of the ETS Directive and Renewable Energies Directive.  He is an external professor of environmental law and policy at the College of Europe.

Photo of Paul Mertenskötter Paul Mertenskötter

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new…

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new technologies. Mr. Mertenskötter’s practice encompasses advising clients on the European Commission’s Digital Single Market strategy, including on the Payment Services Directive (PSD 2).

Prior to joining the firm, Mr. Mertenskötter clerked at the International Court of Justice in The Hague, and was a Fellow at the Institute for International Law and Justice at NYU Law School. His work has been published with Oxford University Press and the Cornell Law Review.