Europe’s Carbon Curtain
By Terk Felix Kraft, 5 minutes
Global warming forces Europe to rethink its industrial production and sets national decision-makers before a legislative paradox. Meanwhile, Brussels has come up with a controversial solution that has the potential to either harmonise or rip apart the world’s entire supply chain network.
In order to tackle climate change and species extinction, the European Green Deal prescribes to the European Union (EU), its countries, population, and decision-makers, a number of environmental targets to meet. One of these targets is climate neutrality by 2050 and meeting that aim is going to have an enormous impact on just about any aspect of our economy. In other words: Our elected officials will have to guide sectors 1 and 2 of our economy (agriculture and industry) towards largely climate-neutral means of production. However, once regulators start toughening environmental standards for goods produced in their country, they run into a paradox.
Backfiring Legislation
Let’s play a game: Imagine you’re a lawmaker and your aim is to raise environmental production standards, for example regarding CO2 pollution. You might do so by directly regulating business or through an Emissions Trading System (ETS), bringing to market a limited number of certificates that allow their owner to pollute. Whatever your precise formula, it inevitably increases production costs and disadvantages your country’s companies amongst their competitors from across the globe.
But is that bad, if it helps the environment?, you may ask. If only it did! By raising production costs, you have just incentivized firms from your country to move production abroad to places that might have even fewer and lower emission standards than those you had in the first place. Since all of us live on the same planet under the same atmosphere breathing the same air, you have effectively worsened the environmental situation for your constituents.
In addition, you’ve just wrecked a whole industrial sector, eliminated a range of specialised jobs, weakened your country’s position in global supply chains, undermined its Strategic Autonomy, and quite possibly shifted its trade balance. You’re essentially living an elected official’s perfect nightmare, one that is so prominent it got its own official title: Carbon Leakage.
Europe’s Patch on the Carbon Leak
Solving the paradox of practically increasing carbon emissions by toughening emissions standards might be one of the biggest riddles of our time - and the EU has taken it on to solve it! Just recently, on May 10th this year, the European Commission, Parliament, and Council signed the corresponding regulation, establishing a legislative monstrosity under its rather catchy name Carbon Border Adjustment Mechanism or, in short, CBAM.
The EU’s CBAM designates a price to the carbon emitted during the production of carbon-intensive goods (aluminium, cement, fertiliser, electricity, hydrogen, iron and steel) outside the EU, upon entering its Single Market. As the EU itself raises its own climate ambitions, this protectionist measure is deemed necessary in order to prevent Carbon Leakage. The measure objectives are twofold: For one, it aims at protecting domestic production as it decarbonises.
Secondly, and this may be of even greater significance, it incentivizes producers abroad to adopt European environmental production standards in order not to have their products be slashed with what is effectively a carbon toll upon entering Europe’s rich, about 450 million-strong consumer market. Starting from October 1st, 2023, the gradual introduction of the CBAM shall take place in sync with phasing out the allocation of free allowances under the EU’s ETS.
Once fully implemented, CBAM will equalise the carbon price of imports with that of domestically produced goods of the same category. And whereas the EU claims its CBAM to be compatible with the rules of the World Trade Organisation (WTO), the exact set of rules and requirements for the reporting of emissions under CBAM shall be specified further within an implementing act. The WTO’s final verdict upon the EU’s CBAM, thus, is yet to come.
Ursula’s Climate Club
But the venture’s ultimate aim is not merely climate-neutral production in Europe, far from it. Utilising its sizable consumer market as leverage, the EU aims to convince producers (and, by extent, their legislators) outside the bloc of its high environmental production standards. In this way, the EU’s plans foresee consolidating the world’s major developed economies to form a kind of carbon free-trade area, a Climate Club. However, whereas countries like Canada and the United Kingdom have signalled interest, Washington, usually setting the tone on free trade, does not yet seem convinced.
At a later point, emerging economies such as Turkey and trade blocs such as MERCOSUR are supposed to find access to that same free-trade area - by climate-neutralising their agricultural and industrial production. The EU hopes its legislative endeavour will eventually cause a spill-over effect that reaches every corner of the globe, sets new climate-friendly production standards and, notably, establishes the EU as a global regulatory power in economic affairs. Ambitious? Certainly. Megalomaniac? Maybe.
Like the Sword of Damocles, the WTO’s final judgement on CBAM looms over the heads of busy Eurocrats elaborating product emissions tables. Meanwhile, Germany’s chancellor Olaf Scholz appears unimpressed. While refraining from elucidating the CBAM’s technicalities on camera, Scholz joyfully propagates the EU’s vision of a Climate Club to any global leader sparing an ear.
Legislative Gravity
But is this strong enough of an effort, grand enough of a pitch, to save the planet? Some MEPs, especially of the Greens/EFA Group, are not yet convinced. According to Rasmus Andresen, a German MEP for the Green Party, CBAM is going to contribute its part to global emissions reduction. He questions, however, whether CBAM “will be able to promote the establishment of a Climate Club in the sense of the Commission's legislative proposal within the required timeframe.” In other words: The tabled legislative act might lack the gravity to have a timely impact. Concretely, the MEP laments for the organic chemicals and plastics industries not being covered by CBAM as well as the time scope of the scheme’s time launch, which he describes as “very hesitant” and “a giant fly in the ointment”.
At the same time, Andresen considers it a success that, from 2030, all industrial products for which there is imminent Carbon Leakage risk (i.e. which can relatively easily relocate their production site) shall automatically become subject to CBAM. In this way, the scheme may - if belated - sharpen its accuracy.
Résumé
In the past, the EU has repeatedly proven its actorness in regulatory politics. Taking on major digital players in fields such as privacy and competition, it has been described as somewhat of a Regulatory Superpower. Publishing its legal text in a range of languages, Brussels is well aware of the spill-over effects its legislation has on states that might struggle to affirm the rule of law against foreign or corporate interests. Only time will tell, whether the EU will manage to transfer its regulatory abilities onto other, even more competitive policy fields or whether its ambitions end up hemmed in by more powerful global players.
To learn more about the topic, take a look at the EU’s climate ambitions:
European Green Deal:
https://www.commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en
https://ecamaastricht.org/blueandyellow-knowyourunion/europeangreendeal
European CBAM:
https://www.taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
European ETS:
www.climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en
