Page 17 - REM Annual Review 2021

REM AUGUST REM

EU takes carbon pricing

initiative with CBAM

EUROPE THE EU on 14 July unveiled the details of its pro- The scheme allows free allocations of allow-
posed Carbon Border Adjustment Mechanism ances at first, which would gradually fall by 10%
(CBAM), which aims to protect EU CO2 emit- per year, to be replaced by the same proportion
ters from carbon leakage by making exporters of CBAM allowances.
to the EU market pay for the CO2 they produce. The reporting system should be in place by
Forming part of the wide-ranging Fit for 55 2023, with financial payments beginning in
package, which refers to the EU’s 55% target for 2026.
EU reductions by 2030, CBAM will effectively This replacement process would extend until
require non-EU producers of steel, electricity, 2036, the end of the CBAM phasing in period,
cement, chemicals and fertiliser to buy carbon when the mechanism would cover 100% of
allowances using a system based on the existing embedded emissions.
EU Emissions Trading System (ETS). However, if an exporter into the EU can show
Asian exporters of such products, especially that it has already paid for the carbon embed-
China and Japan, are exposed to this new system, ded in its products in another country, that cost
and will be concerned that they will lose some would be deducted from the CBAM levy paid
competitiveness with EU rivals. by the EU importer. This aims to avoid break-
The CBAM is supported by some EU mem- ing WTO rules against double taxation, which
ber states and by green think-tanks. Many car- prevent importers paying twice for the same
bon-intensive industries are also supportive, emissions.
providing they continue to receive free alloca-
tions of EU allowances. Other Fit for 55 measures
The CBAM is most vulnerable to legal chal- The Fit for 55 package also reforms the EU ETS
lenge on trade grounds, as it could fail to meet system, most notably by nearly doubling the
WTO rules. Brussels itself insists that it complies rate at which the EU ETS emissions cap declines
with the WTO. It could also cause trouble dur- year by year, the so-called linear reduction fac-
ing global climate trade talks, such as COP26 in tor (LRF), from 2.2% to 4.2%. The EU said that
Glasgow in November. the faster 4.2% rate was needed to meet its 55%
Less developed countries, which could face reduction target for 2030.
being left behind in the campaign to reduce The EU said that with the current 2.2%
emissions, could also feel the negative effects of rate, the system would deliver a 51% emissions
the CBAM as they become less competitive with reduction by 2030, relative to 2005 levels.
their EU rivals. However, an economy-wide reduction target
The Fit for 55 package fleshes out the details of 55%, relative to 1990, the key Fit for 55 metric,
of meeting the aspirations of the EU Green Deal, requires a lot more. The 4.2% rate would enable
which was first published in December 2019 and the EU ETS to deliver a 61% emissions reduc-
first set the 55% target. tion by 2030, relative to 2005, the EU said.
The ETS will also be extended to half of inter-
CBAM national shipping to and from the EU, as well
The CBAM would work by requiring EU as all intra-EU maritime travel, and free allow-
importers of non-EU iron, steel, aluminium, ances for intra-EU flights will be phased out.
cement, fertilisers and electricity to pay for the Also, road transport and buildings will
carbon emissions embedded in those products have their own parallel EU ETS scheme from
from 2026. 2026, which will involve distributors of heat-
Together, these sectors account for 45% of ing and transport fuels, rather than individual
emissions from sectors at potential risk of carbon car drivers or building owners. It will aim to
leakage, the EU said. reduce emissions by 43% by 2030, with a 2005
Importers would buy a CBAM certificate for benchmark.
each tonne of embedded carbon dioxide, with In terms of funding, the EU will double the
the price linked to the EU ETS price, which is budget of its EU Innovation Fund to €50bn per
currently at a high of €50 per tonne. Revenues year between now and 2030.
from this, which could reach €10bn per year, Brussels will also ban sales of new fossil-fuel
would fund the CBAM system, with the rest cars after 2035 and provide social support for
being swallowed up by the EU’s general budget. EU citizens affected by the green transition.

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