Michael Mehling PMR Perspectives Series | 5 May 2021 - Carbon Border Adjustment Mechanism (CBAM): Implications for the ECA Region

Carbon Border Adjustment Mechanism (CBAM):
Implications for the ECA Region
Carbon Pricing Developments in Europe and Central Asia (ECA)

Michael Mehling
PMR Perspectives Series | 5 May 2021

 http://ceepr.mit.edu

Flow of the Presentation

1. What are Border Carbon Adjustments?
2. Europe’s CBAM: State of Play
3. Critical Design Elements
4. Design Implications for the ECA Region: Sectoral
 Scope, Determination of Emissions, Policy Crediting
5. Outlook

What are Border Carbon Adjustments?
• Border carbon adjustments seek to alleviate the negative effects of
 uneven climate policies by targeting imports or exempting exports
• They have several objectives:
 - levelling the playing field in competitive markets as a way of …
 - preventing leakage of carbon emissions to jurisdictions with weaker policies
 - incentivising trade partners to strengthen their own climate efforts
• They can take different forms:
 - a tariff or other fiscal measure applied to imported goods
 - an extension of regulatory compliance obligations (e.g. ETS) to imports
 - a tax exemption or regulatory relief for exports

Rationale of Border Carbon Adjustments

 CO2 Emissions in Imported Goods as a Share of Domestic Emissions
 (Source: Our World in Data, 2018)

Europe‘s Border Carbon Adjustment: State of Play (1)
• 2007-2019: several proposals are circulated in Brussels to advance the
 discussion, but these never gain traction
• July 2019: Ursula von der Leyen includes a ‘Carbon Border
 Tax’ in her political guidelines and subsequent mission
 letters to designated Commissioners, file led by Gentiloni
• December 2019: ‘European Green Deal Communication’ sets out timeline
 for a formal legislative proposal (‘2021’); new name:
 ‘Carbon Border Adjustment Mechanism’ (CBAM)

Europe‘s Border Carbon Adjustment: European Green Deal

 (Source: Timmermans, 2019)

Europe‘s Border Carbon Adjustment: State of Play (2)
• December 2019: European Council endorses work, states that ‘facilities in
 third countries need to adhere to the highest environmental … standards’
• March 2020: Inception Impact Assessment Roadmap and public
 consultation on the elements of assessment; 219 submissions
• May 2020: European Commission mentions CBAM revenue (‘€5
 to €14 billion per year’) as potential source for EU recovery plan
• July 2020: European Council calls for CBAM to be operational by early 2023
• October 2020: Public consultation ends; 609 reactions
• March 2021: Plenary resolution by the European Parliament
• July 2021: Legislative Proposal expected as part of the “Fit for 55” package

Europe‘s Border Carbon Adjustment: State of Play (3)

 A Possible Timeline?

 (Source: Mehling, 2021)

Critical Design Elements (2)

 (Source: Marcu, Mehling & Cosbey, 2020; Marcu, Mehling & Cosbey, 2021)

Critical Design Elements (3)

• Coverage of trade flows: imports, exports, or both?
• Policy mechanism: tax, customs duty, extensions of EU ETS, or other?
• Scope
 - Geographic scope: all countries, or narrower scope/exemptions?
 - Sectoral scope: basic materials, electricity, semi-manufactured/manufactured goods?
 - Emissions scope: direct emissions only, or also indirect emissions (Scope 2/3)?
• Determination of embedded emissions: based on defaults or actual data?
• Calculation of adjustment: explicit carbon price differential, other?
• Use of revenue: EU budget, environmental investment, climate finance?
• Institutions and process
 - Institutional governance: designated institution/agency?
 - Process flow and timeline: study of feasibility/impacts, consultations, expiration?

Sectoral Scope
 Carbon cost
 Exports to EU27 (by Value, Data for 2020)
 Product as % of value
 at
 (PRODCOM Code) Kazakhstan Turkey Ukraine
 €50/tCO2e*

56: Fertilizers € 928.00 € 81,337,714.00 € 76,380,384.00

66: Non-Metallic Minerals € 4,580,802.00 € 1,251,442,437.00 € 251,147,645.00

 33%
 661: Lime, Cement € 388.00 € 330,620,694.00 € 39,616,250.00
 (cement)
 11%
67: Iron and Steel (steel)
 € 73,439,163.00 € 2,726,092,554.00 € 2,489,350,165.00

68: Non-Ferrous Metals € 355,437,402.00 € 1,496,638,122.00 € 61,987,575.00
 48%
 684: Aluminium € 164,018,322.00 € 952,457,420 € 18,917,448
 (aluminium)
 27%
35: Electric Current (electricity)
 €0 € 44,622,553.00 € 192,600,461.00

 TOTAL € 433,458,295.00 € 5,600,133,380.00 € 3,071,466,230.00

 * Calculated using global average carbon intensity values and global commodity prices (or wholesale electricity prices), with €50/EUA
 (Sources: trade data from Eurostat; commodity price data from Statista; IEA; carbon intensity data: cement; aluminium; steel; electricity)

Individual Adjustment and Policy Crediting
• Compatibility with non-discrimination principle set out in WTO law
 requires, among other things, that the CBAM ensure:
 – Ability of foreign producers to demonstrate actual carbon intensity of production with
 reported and independently verified emissions date (‘individual adjustment)’
 – Avoidance of burdening foreign producers twice by recognizing circumstances –
 including climate policies – in the country of origin (‘policy crediting’)
 CBAM at default value
 CBAM Revenue €

 CBAM with individual adjustment

 CBAM with policy crediting

 CBAM that rebates exports

 (Source: Mehling, 2021, based on DSGV 2020)

Outlook

 (Source: World Bank, 2020)
 http://ceepr.mit.edu

Further Reading
Stuart Evans, Michael Mehling, Robert A. Ritz, and Paul Sammon. ‘Border Carbon
Adjustments and Industrial Competitiveness in a European Green Deal.’ 21 Climate Policy
(2021): 307-317. https://doi.org/10.1080/14693062.2020.1856637
Andrei Marcu, Michael Mehling & Aaron Cosbey. ‘Border Carbon Adjustments in the EU:
Issues and Options.’ ERCST Report, September 2020. https://ercst.org/border-carbon-
adjustments-in-the-eu-issues-and-options
Michael Mehling, Harro van Asselt, Kasturi Das, Susanne Droege & Cleo Verkuijl. ‘Designing
Border Carbon Adjustments for Enhanced Climate Action.’ American Journal of
International Law, Vol. 113, No. 3 (July 2019), pp. 433-481. https://bit.ly/2nWB9Do
Michael Mehling and Robert Ritz. ‘Going Beyond Default Intensities in an EU Carbon Border
Adjustment Mechanism.’ Cambridge Working Paper in Economics 2087, September 2020.
https://www.eprg.group.cam.ac.uk/wp-content/uploads/2020/09/2026-Text.pdf

Thank you for your attention!

 Questions? Please ask, or contact me at:
 @ mmehling@mit.edu
  +1 (617) 324-7829
 @mmehling

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Sources for BCA Announcements Outside the EU
United States
“… the Biden Administration will impose carbon adjustment fees or quotas on carbon-intensive
goods from countries that are failing to meet their climate and environmental obligations…”
Source: Plan for Climate Change and Environmental Justice (‘Biden Climate Plan’, 2019), p. 13

Canada:
“The government intends to launch a consultation process on border carbon adjustments in
the coming weeks. …”
Source: A Recovery Plan for Jobs, Growth, and Resilience: Budget 2021 (April 2021), p. 176
Mexico:
“… conditional commitments rely on … adjustment of tariffs for carbon content … ”
Source: Nationally Determined Contributions. 2020 Update (Dec. 2020), p. 12