Last week, the European Commission launched a public consultation on the possible adoption of a new EU Carbon Border Adjustment Mechanism (“CBAM”).  This consultation is yet another of the initiatives that the Commission is taking to roll out its ambitious European Green Deal (for a recent overview webinar see here).  Manufacturers in virtually all industrial sectors and their trade associations would be wise to assess the potential impact of the CBAM on the products they market in Europe and to consider participating in the public consultation and comment process.

Europe’s discussions on the introduction of a CBAM are at the crossroads of two priority regulatory areas for the EU.  On the one hand, the CBAM initiative is part of the Green Deal, which has now become the main driver for the EU’s recovery plan in response to the COVID-19 crisis.  On the other hand, the CBAM fits with the EU’s industrial strategic objective to “level the playing field” between companies in the EU and those competing from elsewhere.  This agenda for a “level playing field” finds additional manifestations in the European Commission’s recent announcement on the screening of foreign direct investment and foreign subsidies.

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 will push other countries across the world to also decarbonize.  In line with this, in its Communication on a European Green Deal in December 2019, the European 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.”  The Commission’s Inception Impact Assessment on the Adjustment Mechanism also stated 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.”

Half a year and a pandemic after the European Commission’s announcement of its Green Deal, the EU and many of its Member States appear firmly committed to adopting some sort of CBAM.  Indeed, the fact that the CBAM sits at the crossroads of the Green Deal and the EU’s level playing field strategy strongly suggests that the Commission and later the European Parliament and Council will move swiftly on this legislative file.  The European Parliament has already been working on its own initiative, and the European Commission is expected to present a formal legislative proposal to the Parliament and Council in 2021.

In principle, the CBAM could cover all sectors subject to the EU’s Emissions Trading System (“ETS”).  However, at this stage, the thinking within the European Commission seems to be converging initially on only subjecting the steel and cement industries to the CBAM.  Steel and cement products are energy intensive in their production and their low-cost, heavy, and bulky nature means that their transport is, in terms of relative price, also often energy intensive.  This could be why the Commission may be considering these products as particularly suited for the CBAM, serving also as a trial run for potential extensions to other products at a later stage. This thinking within the Commission is, of course, subject to the results of the public consultation and other exchanges over the coming months.

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 and steel), or instead apply horizontally across all industrial production?
  • What will be the specific design of any CBAM? Would it strictly apply as a tax at the border, or would it be folded into the existing ETS regime, perhaps also creating new obligations for economic activity within the EU?
  • How will the EU be able to develop an objective methodology to calculate the carbon footprint of a product?
  • 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?
  • Should the introduction of a CBAM mean the complete end of free ETS allowances for industrial sectors suffering from “carbon leakage”?
  • What design would be necessary to ensure the CBAM’s compliance with the EU’s international economic law obligations, particularly those of the World Trade Organization, bilateral trade agreements between the EU and third countries, and multilateral environmental agreements that call for “common but differentiated responsibilities” in the fight against climate change?

The consultation’s specifically listed questions touch upon the general issues outlined above and cover four principal areas:

  • Justification and objectives (g., is the Green Deal going to increase “carbon leakage”?).
  • Design and coverage (g., the relationship with the ETS).
  • Specific implementation issues (g., how to calculate and verify the carbon content of imported products).
  • Potential impacts on the economy, the environment, and other social objectives (g., changes to the costs of products covering basic needs).

Interested parties may submit comments to the specific questions in these areas as well as more general arguments on the CBAM until October 28, 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 Sinéad Oryszczuk Sinéad Oryszczuk

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and…

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and in-house teams including corporate, real estate, projects, construction, planning, health and safety, IP, insurance, and banking. She is experienced in contentious matters, assisting clients before criminal, civil, administrative and specialist tribunals, and non-contentious (regulatory, transactional/M&A) matters. She has advised in relation to some of the UK’s most high profile recent environment cases up to Court of Appeal level, as well as large group actions, and has brought cases before the European Court in life sciences matters. Prior to joining the firm, Ms. Oryszczuk spent 5 years in the UK’s leading specialist energy, environment, and regulatory team.

Ms. Oryszczuk has broad experience in traditional environment areas such as contaminated land and allocation of environment liabilities in transactions, permitting, waste, climate change, species-specific requirements, emissions, and contentious work including prosecutions relating to large scale pollution incidents, environmental damage, and general regulatory and subject specific ad-hoc advice. Ms. Oryszczuk also provides advice on specialist scientific and technical regulatory aspects spanning a variety of sectors. She has built up particular expertise in chemicals law and hazardous/regulated substances (e.g. REACH, CLP, RoHS, biocides, nuclear/radiological), novel technologies and agri-tech (e.g. advanced genetic engineering, GMOs, nano), and corporate/accounting and regulatory energy and environment reporting and efficiency (e.g. EU ETS, CRC, mandatory energy audits (ESOS) and non-financial reporting).

Ms. Oryszczuk advises day-to-day on transactional matters and liability (including director/officer and parent company), land contamination and hazardous substances, and in multinational competitive bids. She has a broad experience including in relation to manufacturing and waste facilities, energy storage projects, wind farms, grid projects, redevelopments and remediation projects, landfills, mines and minerals operations, and nuclear and radioactive materials facilities. She has acted for a variety of parties including buyers/sellers, tenants/landlords, bidders, lenders, insurers, developers, authorities/regulators, trustees, insolvency practitioners, and private equity/funders. Ms. Oryszczuk provides specialist corporate due diligence (including vendor due diligence). She often acts as specialist outside counsel and has drafted bespoke instruments including transfer of liability deeds, contractor T&Cs, site remediation/investigation/access agreements, as well as environment indemnities and warranties. Ms. Oryszczuk often coordinates multinational projects and advice and regularly liaises and negotiates with regulators on behalf of her clients. On corporate work in particular, Ms. Oryszczuk assists very large multinationals (including global asset funds) with complex organisational structures through national and international compliance scenarios, including on corporate reporting and carbon .trading.

On contentious work, Ms. Oryszczuk has taken leading roles in some of the UK’s largest and most high profile environment cases, often building on her science background in respect of issues concerning hazardous substances. She regularly defends in relation to large domestic civil group actions relating to environment issues. More recently she has acted in contentious life sciences cases relating to medicinal products including before the European Court and national regulators, e.g. the UK’s NICE.

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.