EU carbon border charge threatens exports: AEGIS Europe

A planned EU Carbon Border Adjustment Mechanism threatens exports of carbon-intensive goods if the measure replaces free carbon allowances as planned by the European Commission, a group representing heavy industries said April 28.

The EC's July 2021 CBAM proposal seeks to place a charge on the carbon content of certain goods imported into the 27-member bloc.

The system seeks to replace free carbon allowances under the EU Emissions Trading System for affected sectors -- a move that has triggered heated debate over the impact on European manufacturers, particularly those that export goods.

"CBAM is about creating a level playing field in terms of carbon cost. At a price of Eur100/mt, carbon costs can represent about 50% of the production costs for some CBAM products," said AEGIS Europe, which represents 23 manufacturing industries.

"Export markets would therefore be immediately lost, if CBAM is accompanied by a phase-out of free allocation," the group said in a webinar.

Under the EC's proposal, EU-based companies importing iron and steel, fertilizers, cement and electricity would have to buy CBAM certificates linked to carbon prices under the EU ETS.

EU carbon prices were valued at Eur81.01/mtCO2e ($85.05/mt) at the close April 27, according to S&P Global Commodity Insights price assessments. That compares with an all-time high of Eur96.33/mtCO2e seen Feb. 7 and an average of Eur53.52/mtCO2e in 2021.

New reality

AEGIS Europe warned that the EC's CBAM proposal was based on an impact assessment with assumptions that are no longer valid, citing natural gas prices that are four times higher than in 2021 and a carbon price that has soared close to Eur100/mtCO2e.

This combination of factors has left some European companies "close to breaking point," the group said.

For AEGIS Europe's members, direct exports amount to over Eur135 billion per year, it said.

Under the EU ETS, free carbon allowances have been provided to protect Europe's industrial sectors from unfair competition in jurisdictions that have not imposed carbon pricing.

However, free allowances provide little incentive to reduce emissions, and the EC wants all sectors to contribute to climate targets, placing free allocation in regulators' crosshairs.

AEGIS Europe argued that the EU should maintain free allowances alongside a CBAM during a transition period from 2026-2030, giving time to assess its effectiveness.

The group also urged the EU to introduce export adjustments alongside the gradual phase-out of free allowances.

Loopholes in the CBAM proposal must be addressed to prevent circumvention and the CBAM needs to be periodically re-assessed, with the involvement of the relevant industries, it said.

The group also underlined that some carbon costs for industries are not covered by free allocation under the EU ETS.

To ensure compatibility with World Trade Organization rules requiring fair and equal treatment on tariffs, during the testing period the CBAM should only cover the part of the carbon costs of goods not covered by free carbon allowances, it said.

The EU Parliament is expected to vote on the CBAM in plenary June 6-9, after which negotiations are set to begin between the parliament and EU member states before the measure can become law.