The EU wants to impose a carbon border tax on Europe’s borders and thus protect domestic producers from dirtier (sic) producers from abroad. Experts warn of a loophole that could hit German exporters seriously.

Federal Minister of Economics Peter Altmaier met two Vice-Presidents of the European Commission when he visited Brussels on Friday: Margrethe Vestager, who is responsible for digital, and Valdis Dombrovskis, who is responsible for economic issues. The CDU politician wanted to talk to both of them about the steel industry – and about how European steel producers can economically survive the tightening of EU climate targets.

The plans for a CO2 border adjustment tax are also likely to have been an issue. Because the work of the Commission on legislative proposals for such a CO2 surcharge at the borders of the EU are ready to go. The Carbon Border Adjustment Mechanism, which in Brussels is affectionately known as CBAM for short, aims to make imported products that are produced less climate-friendly overseas than in Europe more expensive at the borders of the EU.

This climate protection wall around the continent is intended to ensure that European producers with their higher energy costs and stricter environmental regulations remain competitive on their home market. Stricter climate rules and rising energy prices should be possible without endangering jobs, for example in the energy-intensive steel industry.

How exactly the border adjustment tax will be structured won’t be known until July 14th, when Commission President Ursula von der Leyen and Vice-President Frans Timmermans, who is responsible for climate issues, present their large “Fit for 55” climate package; a bundle of a dozen legislative proposals aimed at promoting the climate-friendly restructuring of the EU economy. The CBAM plans are a central element of the legislative package.

Business fears

The more details of the necessarily ambitious plans become known, the clearer it becomes what they mean for European companies affected. This also applies to the border adjustment. Previously unpublished drafts of the Commission for legislative proposals confirm the fears of the companies concerned.

According to this, European producers of particularly energy-intensive products should in future be protected in the EU market from foreign competition which can produce dirtier and thus cheaper. In return, the companies in the affected industries should no longer receive free certificates for EU trade in carbon certificates. This is what it says in an unpublished draft of the Commission for a directive for the reform of the EU emissions trading ETS, which WELT has received.

“A CO2 border adjustment mechanism (CBAM) is an alternative measure to prevent the migration of CO2-intensive companies,” it says. “Sectors and sub-sectors that are covered by this measure should therefore no longer receive free allocations.” Changes can still be made until the final legislative proposal is published in mid-July.

From the Commission’s point of view, the coupling of CBAM and free allocation is hardly avoidable: If European producers were protected from foreign competitors by both border adjustment and free certificates, they would be subsidised twice. The Commission fears that the border adjustment would then clearly violate the rules of the World Trade Organization.

For Brussels, it is crucial that the border adjustment is WTO-compliant. Otherwise, trading partners who feel they are being treated unfairly by the rules could impose punitive tariffs. Therefore, CBAM will not be a simple tax, but a complicated process in which importers have to buy special pollution certificates – similar to their competitors from the EU.

WTO-compliant or not: Researchers are increasingly sounding the alarm against the plans. In principle, economists support the plans for the border adjustment. Such measures are necessary in order to pursue more ambitious climate goals in a globally networked world than those found with trading partners.

Global trade disadvantages

Now, however, German and French researchers from the Center for European Policy Network (CEP) have spoken out. They warn that the CO2 border adjustment will only protect European companies from cheap competition in their home EU market. However, European producers could then no longer be competitive on the world market.

“The Commission is not planning a CBAM for European exporters,” write the authors of a CEP study seen by WELT. “The exporters should therefore not receive any compensation for the discontinuation of the free allocation. As a result, they suffer considerable competitive disadvantages compared to their competitors from third countries. “

The authors refer to a draft of the CBAM law that became known at the beginning of June. A more up-to-date and obviously more advanced draft, which WELT has, also does not provide any support for exporters.

“The combination of the complete abolition of the free allocation and the restriction of the border adjustment to imports increases the likelihood that production will migrate to countries with less stringent climate protection regulations,” says the 40-page analysis. “The result is a loss of added value and jobs in the EU and an increase in global emissions.”

Free allocations required for export products

The authors demand that the EU Commission renounce their plan. “The Commission should abandon its plan to replace the current system of free allocation of emission rights with a CBAM without replacement,” the authors write.

“Instead, as long as an emissions trading system is not enforceable on a global level, the EU should do everything in its power to ensure that the most important industrialised and emerging countries agree on such a system. The free awards can only expire under this condition, as the remaining competitive disadvantages of European companies can then be absorbed. “

If the Commission sticks to its plans for CBAM, it should at least keep the free allotments for products that are exported. The authors suggest that the free awards could then be dropped for products sold in the EU.

The Scientific Advisory Council of the Federal Ministry of Economics has long warned against the EU going it alone. Depending on the design of the CO2 lock, there is a risk of expensive and time-consuming bureaucracy and even trade disputes.

The Advisory Board’s researchers also advocate that the EU should join forces with other economies such as the USA, Great Britain and, ideally, China and Russia to form a climate club – a kind of climate free trade zone in which all companies produce under similarly strict climate protection requirements.

Full story (in German)

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July 5, 2021