Main features and mechanisms of the CBAM
I. Institutional framework
1. Timeline and structural conditions for the CBAM phase-in
In this chapter, we will review and synthesize the structural conditions and objectives that lead to the CBAM design, proposal, and implementation; as well as the timeline that rhythmed said phase-in. Those structural conditions are of various analytical scale and nature. Indeed, some are climate-related, directly linked to the fight against climate change such as the support role of the CBAM to the EU GHG Emissions reduction; some are rooted at a microeconomic level such as the objective of mitigating the risk of competitiveness loss for domestic producers; and some are anchored at a macroeconomic level, such as the objective to mitigate the risk of carbon leakage in international trade, or the objective to support international climate action.
Firstly, one must understand that if, as abovementioned, the CBAM is one of many tools included in the EU Green Deal, it is hence necessarily a contributing factor to the EU GHG Emissions reduction target - which is to "reduce greenhouse gas (GHG) emissions by at least 55prct compared to 1990 levels by 2030 and achieve carbon neutrality by 2050" [1]. More specifically, it focuses on a specific emissions sub-stream: Embedded emissions. Figure 1 below offers an overview of the intensity of CO2 emissions embodied in total gross worldwide exports of final products in 2015. As stated in a preliminary study by the European Parliament before voting on the CBAM, while GHG Emissions within EU jurisdiction fell by 24prct, embedded GHG Emissions have continued to rise to a state where "net imports of goods and services into the EU account for over 20prct of the EU's CO2 emissions" [2]. More generally, the CBAM implementation arguably holds GHG abatement power because its role is to strengthen the carbon price signal under EU ETS for concerned sectors and across their value chain [2]. For a full understanding of the efficiency and magnitude of the CBAM, further econometric analysis will have to be conducted. Some relevant indicators are the evolution of investments volume in i) "Efficiency improvements for material producers", i.e. basic decrease of the production's carbon intensity; ii) "Climate-neutral production processes", i.e. carbon cost internalisation; iii) "Material efficiency and substitution with low-carbon alternatives", i.e. low-carbon material use and optimisation; and iv) Recycling [2].
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Figure 1. Intensity of CO2 emissions embodied in total gross exports of final products in 2015 (in tonnes per USD million)
Secondly, the CBAM is set to limit and mitigate the risk of competitiveness loss for EU domestic producers. Indeed, more stringent climate ambition, under the EU Green Deal, triggers rising costs in concerned sectors correlated with the EU Scale of climate abatement. Based on this proportional relationship, more stringent abatement features and steeper abatement path under phase 4 EU ETS are offset by the CBAM which will "level the playing field" in international trade, and avoid brutal costs rise.
Thirdly, another structural condition to the CBAM implementation is the evolution of carbon leakage risk under EU ETS. Carbon leakage risk is not new under EU ETS, but two significant trends must be analyzed: i) Pressure on EU Producers and Carbon leakage increase proportionally to the widening asymmetry of worldwide climate efforts, especially with the EU strengthening its ambition relatively to its trading partners; and ii) with Phase 4 EU ETS, the mechanism to mitigate carbon leakage risk will transition from Free EU Allowances, to CBAM coverage. In order to understand this process, one must deepdive into the Fit for 55 package. The fit for 55 package is a set of policy amendment to the EU Green Deal which "intend to facilitate a European Union greenhouse gas emissions cut of 55prct by 2030 compared to 1990 [and have] as its core mission to turn the 2020s into a transformative decade for climate action" [3]. As stated in IETA "Fit for 55 Legislative Package" summary, "free allocation to sectors covered by the CBAM will be gradually phased out, decreasing 10prct a year from 100prct starting in 2025 to 0prct in 2035" [4]. Plus, this gradual phase-out of Free EUA is justified by the incompatibility of the latter with \textit{"long-term demands of deep decarbonization" [1].
Fourthly, through the CBAM, the EU holds leverage when it comes to setting international climate action. This last structural condition is influence-based, and relate to the diffusion power of the CBAM as a climate policy. The CBAM implementation would act, firstly, as a proof of successful climate policy implementation; secondly as a converging force towards Paris Agreements target; and thirdly should alleviate the risk of protectionism indicting for the implementing jurisdiction
Bibliography
[1] Kardish, C., Duan, M., Tao, Y., Li, L., Hellmich, M.(2021). The EU carbon border adjustment mechanism (CBAM) and China: unpacking options on policy design, potential responses, and possible impacts. Berlin: adelphi.
[2] European Commission.(2021). Study on the possibility to set up a carbon border adjustment mechanism on selected sectors.
[3] Tagliapietra, S.(2021). Fit for 55 marks Europe’s climate moment of truth. Bruegel.
[4] IETA.(2021). Fit for 55prct Legislative Package: Summary.