Page 16 - bne magazine September 2021_20210901

16 I Companies & Markets bne September 2021
bne:Green
EU takes carbon pricing initiative with CBAM
bne IntelliNews
The EU on 14 July unveiled the details of its proposed Carbon Border Adjustment Mechanism (CBAM), which aims to protect EU CO2 emitters from carbon leakage by making exporters to the EU market pay for the CO2 they produce.
Forming part of the wide-ranging Fit for 55 package, which refers to the EU’s 55% target for EU reductions by 2030, CBAM will effectively require non-EU producers of steel, electricity, cement, chemicals and fertiliser to buy carbon allowances using a system based on the existing EU Emissions Trading System (ETS).
The CBAM is supported by some EU member states and by green think-tanks. Many carbon-intensive industries are also supportive, providing they continue to receive free allocations of EU allowances.
The CBAM is most vulnerable to legal challenge on trade grounds, as it could fail to meet WTO rules. Brussels itself insists that it complies with the WTO. It could also cause trouble during global climate trade talks, such as COP26 in Glasgow in November.
Less developed countries, which could face being left behind in the campaign to reduce emissions, could also feel the negative effects of the CBAM as they become less competitive with their EU rivals.
The Fit for 55 package fleshes out the details of meeting the aspirations of the EU Green Deal, which was first published in December 2019 and first set the 55% target.
CBAM
The CBAM would work by requiring EU importers of non-EU iron, steel, aluminium, cement, fertilisers and electricity to pay for the carbon emissions embedded in those products from 2026.
Together, these sectors account for 45% of emissions from sectors at potential risk of carbon leakage, the EU said.
Importers would buy a CBAM certificate for each tonne of embedded carbon dioxide, with the price linked to the EU ETS price, which is currently at a high of €50 per tonne. Revenues
www.bne.eu
Unipro's Surgutskaya GRES-2 in Russia.
from this, which could reach €10bn per year, would fund the CBAM system, with the rest being swallowed up by the EU’s general budget.
The scheme allows free allocations of allowances at first, which would gradually fall by 10% per year, to be replaced by the same proportion of CBAM allowances.
The reporting system should be in place by 2023, with financial payments beginning in 2026.
This replacement process would extend until 2036, the end of the CBAM phasing in period, when the mechanism would cover 100% of embedded emissions.
However, if an exporter into the EU can show that it has already paid for the carbon embedded in its products in another country, that cost would be deducted from the CBAM levy paid by the EU importer. This aims to avoid breaking WTO rules against double taxation, which prevent importers paying twice for the same emissions.
Other Fit for 55 measures
The Fit for 55 package also reforms the EU ETS system, most notably by nearly doubling the rate at which the EU ETS emissions cap declines year by year, the so-called linear reduction factor (LRF), from 2.2% to 4.2%. The EU said that the faster 4.2% rate was needed to meet its 55% reduction target for 2030.
The EU said that with the current 2.2% rate, the system would deliver a 51% emissions reduction by 2030, relative to 2005 levels.
However, an economy-wide reduction target of 55%, relative to 1990, the key Fit for 55 metric, requires a lot more. The 4.2% rate would enable the EU ETS to deliver a 61% emissions reduction by 2030, relative to 2005, the EU said.
The ETS will also be extended to half of international shipping to and from the EU, as well as all intra-EU maritime travel, and free allowances for intra-EU flights will be phased out.
Also, road transport and buildings will have their own parallel EU ETS scheme from 2026, which will involve distributors of