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Pricing Carbon at the Border: Europe’s Carbon Border Adjustment Mechanism (CBAM)

Michael MehlingBaker Institute CES Weekly Webinar | 30 June 2021

Flow of the Presentation

1. Europe’s CBAM: History and State of Play

2. CBAM Design: What We Know (or Think We Know)

3. ‘Hot Issues’ and Outlook

• 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 BorderTax’ in her political guidelines and subsequent missionletters 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: State of Play (1)

Europe‘s Border Carbon Adjustment: European Green Deal

(Source: Timmermans, 2019)

• 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 (‘€5to €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 (2)

CBAM Design: What We Know (1)

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

CBAM Design: What We Know (2)

Design Element Proposed Design Provision

Policy Mechanism EU Regulation; Notional ETS Art. 1, 2

ScopeCountries All, except countries with linked ETS Art. 2, Annex IISectors Cement, Fertilizer, Steel, Aluminum, Electricity Art. 2, Annex IEmissions ‘direct and indirect emissions’ Art. 2(n), Annex III

Trade Flows Imports only Art. 4

Determination of Embedded Emissions

Transitional Period: declared emissions data, fallback: average EU carbon intensity

Default: declared emissions data, fallback: carbon intensity of worst 10% EU performers

Art. 41

Arts. 7 and 8

Crediting of Foreign Policies Crediting of explicit carbon pricing only Art. 9

Revenue Use Coverage of costs of operation and maintenance, balance to the EU budget (‘own resource’) Art. 21

Institutional Aspects Creation of a CBAM Authority; Administration of Authorization, Declaration, Certificates, Appeals

Arts. 4-6, 12 et sqq.

* Based on leaked CBAM Draft Regulation (3 June 2021), as reported and made available in media reports (e.g. Euractiv)

Outlook and Some ‘Hot Issues’ (1)

(Source: Mehling, 2021)

A Tentative Timeline

Outlook and Some ‘Hot Issues’ (2)• Some ‘Hot Issues’ that will need to be resolved:

- Status of continued free allocation- Addressing leakage from exports- Policy crediting of non-pricing policies- Delegated acts on MRV process for foreign producers and default values- Uncertain revenue amount and use

CBAM

Rev

enue

€

CBAM at default value

CBAM with individual adjustment

CBAM with policy crediting

CBAM that rebates exports

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

Thank you for your attention!

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

@mmehling

Further ReadingStuart 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

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