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bne June 2021 Companies & Markets I 27
The EU’s Green Deal: Putting a carbon price on imports
Richard Lockhart in Edinburgh
The European Union unveiled its Green Deal in December 2019 with European Commission President Ursula von der Leyen referring to the plans as Europe’s “man on
the moon moment”, stressing Brussels’ determination for Europe to become the world leader in reducing emissions and combating climate change.
The headline target is to reach net-zero emissions, alternatively called being climate neutral, by 2050.
The first step to achieving this is to increase the 2030 emissions reduction target to 55% of 1990 levels, up from the previous 40%.
This metric means that UNFCCC’s COP26 targets for restricting global warming to 1.5 degrees by 2050 should be met. The European Parliament passed these targets into law in April 2021.
EU Commission President Ursula Von der Leyen has appointed Commissioner Frans Timmermans to head up European Green Deal.
All this would require €8 trillion from the EU’s budget, with a further €1 trillion coming in private investment.
Put another way, for the EU to reach its goals set out in the deal, approximately €260bn per year of investment is going to be required.
Wider green deal
While the central question is reducing emissions, the whole green deal package covers virtually all areas of the European economy.
This includes what the EU calls the circular economy, which involves boosting recycling and reducing raw material usage by industry. This will affect carbon-intensive industries such as steel, cement and textiles.
Efforts to decarbonise steel are a major focus, with Brussels wanting to fast-track clean steel made using hydrogen by 2030.
The Green Deal also covers a large number of parts of the sustainable economy, from housing to transport, biodiversity, construction, technology, agriculture, chemicals and methane.
The Green Deal also recognises that some post-industrial regions will suffer excessively. The Just Transition mechanism
aims to provide extra funding to specific regions ad sectors, such as so-called rustbelt areas of Germany or Central Europe. This would involve €100bn of EU cash, either from the existing regional budget or from the European Investment Bank (EIB), to fund a Just Transition. The EU even plans to bend state aid rules to allow public support such for green projects.
In terms of cleaner tech, the EU will also earmark 35% ofits €100bn 2021-2027 research budget for climate-friendly technologies.
Carbon Border Adjustment Mechanism
However, there is one weakness to this green deal. While the EU is setting some of the world’s most stringent emissions reductions targets, and enforcing them with such tools as the EU Emissions Trading System (ETS), European companies are exposing them- selves to competitions from non-EU companies that neither have to pay for emissions credits, nor invest in reducing their CO2 output.
This risk, known as carbon leakage, would make European industry uncompetitive with countries with lax climate rules.
European Commission Executive Vice-President Frans Timmermans, who is in charge of the Green Deal, recently warned that the risk of carbon leakage "increases as the EU raises its climate ambition above that of its trading partners."
The Green Deal’s Carbon Border Adjustment Mechanism (CBAM) aims to avoid this by enforcing carbon tariffs that are equivalent to EU ETS carbon prices on imports of certain raw materials from "less climate-ambitious countries," which do not have carbon prices similar to EU levels, Timmermans said.
Russia, the US and Turkey’s polluting industrial sectors, such as steel and cement makers, do not have to meet emissions caps or buy EU ETS credits, currently priced at €50 per tonne.
This would mean that any emissions cut in the EU would in fact be exported, and total global emissions would not fall.
This could be done in two ways. Either the EU buys steel or cement form Russia or Turkey, with the emissions simply exported out of the EU, or EU steelmakers could relocate to neighbouring countries, with the same result.
The EU wants the CBAM, which should enter into force in 2023, to form the cornerstone of its climate and trade policies.
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