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The Carbon Border Adjustment Mechanism (CBAM) could offer a better hope of decarbonisation in energy-intensive industries than free allowances, and could create a first-mover advantage for EU industry in the global race to decarbonisation. However, this will only be possible if this tool is designed to provide real incentives for industries within and outside Europe to reduce their emissions, and demonstrates recognition and understanding for other countriesʼ need and right to develop.

The proposal included several positive elements that can be built upon in the upcoming legislative process.

Basing the system on actual and verified emissions is the fairest possible approach and one that accounts for all emissions generated during production. Additionally, the price of certificates, set on a weekly basis, helps avoid market speculation and ensure convergence between EU emission allowances and CBAM certificates. Finally, having rules reducing the number of certificates available, as well as no export rebates, encourages fairness and other countries to adopt comparable climate policies.

As well as some positives, there are numerous elements of the proposal that should be revised moving forward.

To improve the European Commission’s proposal for a CBAM, Carbon Market Watch makes the following recommendations:

First, the crossover time between the phase out of free allowances and the CBAM, starting in 2026, is extremely damaging. The decade-long combination of measures allows Europe’s heavy industry to continue to pollute well past 2030. Moreover, the reduction of CBAM certificate costs to reflect the free allocation of allowances to EU producers would severely limit this instrument’s effect in encouraging climate action outside the EU, as currently over 95% of industrial emissions are covered by free emission allowances. The overlap between CBAM and free allowances should be removed.

Second, the exclusion of bulk chemicals (except fertilisers) should be reconsidered. CBAM should focus on ETS sectors that contribute significantly to climate change and have high trade levels with the EU. The exclusion of bulk chemicals from the CBAM discards the issue of plastic pollution and sends a negative impression of the EU’s position on this issue worldwide. Moreover, postponing the decision to include indirect emissions until at least 2026 is a missed opportunity. The CBAM should cover direct AND indirect emissions from the start to result in a larger environmental benefit as it would provide importers with an incentive to adopt cleaner production processes and to develop renewable energy.

Third, not giving special consideration to small islands and the world’s least developed nations in the implementation of the CBAM sends a signal that the EU does not recognise other countries’ differentiated capabilities and their own right to develop. The EU should implement mitigating measures in an attempt to aid their development and engage in a dialogue on what technical, financial and capacity support measures could be taken to manage CBAM negative impacts, and help decarbonise their economies.

Fourth, the allocation of revenues from the CBAM to repay the Next Generation EU facility is at odds with the nature and objective of the CBAM, and would raise legal challenges under WTO rules. To ensure the EU increases its contribution to the development as well as the decarbonisation of developing countries, a substantial share of the CBAM revenues should be recycled towards international climate finance and support for developing countries.

Finally, the CBAM should be designed to drive GHG emission reductions globally and avoid creating perverse incentives for European producers. It should therefore exclude export rebates for European companies exporting outside the EU. It is therefore crucial that the European Commission’s proposal to exclude export rebates be upheld.

For more details on our recommendations, please see the briefing attached.

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