EU carbon levy to prevent leakage can raise global climate ambitions

On Monday, the European Parliament debated with Commissioner Paolo Gentiloni how to raise global climate ambition and prevent EU production from being moved to non-EU countries that have less strict greenhouse gas emissions rules, or so called ‘carbon leakage’. The proposal is to place a carbon levy on imports of certain goods from outside the EU, if they come from countries that are not climate ambitious enough. The vote will takes place on Wednesday.

MEPs want to avoid the problem through a Carbon Border Adjustment Mechanism (CBAM).

As European industry struggles to recover from the Covid-19 crisis and the economic pressure due to cheap imports from trading partners, the EU is trying to honour its climate commitments, whilst keeping jobs and production chains at home.

EU efforts to reduce its carbon footprint under the European Green Deal and become sustainably resilient and climate neutral by 2050, could be undermined by less climate-ambitious countries. To mitigate this, the EU proposed a Carbon Border Adjustment Mechanism (CBAM), which would apply a carbon levy on imports of certain goods from outside the EU. MEPs put forward proposals during March’s first plenary session.

Yannick JADOT Group of the Greens/European Free Alliance recalled that the climate agenda was at the heart of the European agenda.

“The interest of the Carbon Border Adjustment Mechanism (CBAM) is to broaden the scope of European climate policy to the entire economy that concerns us. Decarbonizing is important, but we are not going to decarbonize by relocating part of our industry, by deindustrializing Europe. The objective is to counter unfair competition. This aims to ensure credibility, legitimacy, WTO legality and the effectiveness of a border adjustment mechanism to strengthen our climate action and protect our industries.”

If products come from countries with less ambitious rules than the EU, the levy would applied, ensuring imports are not cheaper than the equivalent EU product.

Given the risk of more polluting sectors relocating production to countries with looser greenhouse gas emission constraints, carbon pricing is seen as an essential complement to the existing EU carbon allowances system, the EU's emissions trading system (ETS).

Under the current emissions trading system (ETS), which provides financial incentives to cut emissions, power plants and industries need to hold a permit for each tonne of CO2 they produce. The price of those permits is driven by demand and supply. Due to the last economic crisis, demand for permits has dropped and so has their price, which is so low that it discourages companies from investing in green technologies. In order to solve this issue, the EU will reform ETS.

The new mechanism should align with World Trade Organisation rules and encourage the decarbonisation of EU and non-EU industries. It will also become part of the EU's future industrial strategy.

By 2023, the Carbon Border Adjustment Mechanism should cover power and energy-intensive industrial sectors, which represent 94% of the EU's industrial emissions and still receive substantial free allocations, according to MEPs.

They said that it should be designed with the sole aim of pursuing climate objectives and a global level playing field, and not be used as a tool to increase protectionism.

MEPs also support the European Commission proposal to use the revenues generated by the mechanism as new own resources for the EU’s budget, and ask the Commission to ensure full transparency about the use of those revenues.

The Commission is expected to present its proposal on the new mechanism in the second quarter of 2021.