Carbon leakage works via different channels<\/h2>\n
In general, carbon leakage refers to the shift of CO2<\/sub> emissions to third countries with less strict climate policies. Ambitious national climate policy measures result in higher CO2<\/sub> costs for domestic companies compared to their foreign competitors. There are several channels for carbon leakage:<\/a><\/p>\n In the EU, domestic industrial production is already generally less emission-intensive than in competing third countries. If European production is now replaced by more CO2<\/sub>-intensive foreign production, overall global CO2<\/sub> emissions will increase.<\/p>\n Under the EU Emissions Trading Scheme (EU ETS), the free allocation of emission allowances is intended to reduce the risk of emissions and production being shifted abroad. To date, most allowances in the EU ETS have been allocated free of charge<\/a>. Since 2013, the number of free allowances has been decreasing but companies in CO2<\/sub>-intensive sectors with high trading intensity still generously receive free allowances.<\/p>\n With its more ambitious climate targets, the EU can no longer maintain the system of free allocation. The free allocation of allowances weakens the CO2<\/sub> price signal and the incentives for low-carbon and energy-efficient production.<\/p>\n But unilaterally higher CO2<\/sub> prices in the EU ETS can increase the likelihood and extent of carbon leakage. To prevent this, the CBAM is intended to offset cost differences between EU products that fall under the EU ETS CO2<\/sub> price and goods from third countries which are subject to lower or no CO2<\/sub> prices.<\/p>\n Under the CBAM, importers are required to buy CBAM certificates to ensure that the imported goods are subject to the same CO2<\/sub> price as European products. The goal is to:<\/p>\n If and how exports of European producers to the rest of the world can be taken into account in the CBAM is a highly controversial political and legal issue. In an ideal border tax adjustment<\/a>, the domestic CO2<\/sub> tax is added to imports and rebated for exports.<\/p>\n Currently, the EU Commission proposes a CBAM without cost refunds for exports. Accordingly, EU exporters would remain at a disadvantage in international competition or even face a double cost burden if they are to pay the EU ETS CO2<\/sub> price on their production and the CBAM price on imported inputs.<\/p>\n Thus, industry players are strongly demanding a regulation including rebates or refunds for exports under CBAM to protect the EU industry. Non-EU countries are an important market for European companies in the emission-intensive steel, aluminum and fertilizer sectors: in 2019, nearly 30\u00a0percent of all aluminum exports and one-fifth of all steel and fertilizer exports were shipped to countries outside the EU.<\/a><\/p>\n However, export rebates are hardly enforceable internationally. They threaten trade conflicts with potentially large economic damage. After all, it is very likely that export rebates will be considered a discriminatory and thus prohibited subsidy under WTO law since they favor exports relative to (domestic or foreign) goods for the EU domestic market.<\/p>\n As an incomplete mechanism with enormous international conflict potential, the CBAM can by no means be a silver bullet for the multiple challenges the EU industry faces. Rather, it can protect the EU\u2019s domestic markets from cheap, emission-intensive imports.<\/p>\n But to further protect EU industry and to accelerate emission reductions in the industrial sector, subsidies should complement CO2<\/sub> price and CBAM<\/a>. Financial support for decarbonization, for research and development, and as insurance against innovation risks are key instruments for reducing companies\u2019 cost burden of rising CO2<\/sub> prices.<\/p>\n Additionally, subsidies can protect EU companies against strong international competition, secure transformation risks, and establish competitiveness between (still) expensive climate-friendly domestic technologies and the (often at present) cheaper conventional production at home and abroad.<\/p>\n However, subsidies also come with challenges in implementation. On the one hand extensive subsidies are, at least in the short run, a significant burden on the state budget and politically controversial. On the other hand, they can trigger international trade conflicts as trade partners might see themselves at a disadvantage due to heavy subsidization of European firms.<\/p>\n Finally, international cooperation on climate and trade policy issues remains important \u2013 regardless of differing climate policy approaches and ambitions. Against this background, the concrete design of the CBAM should be carefully considered by the EU, as trade conflicts with important global partners might also undermine common climate policy interests.<\/p>\n Sara Holzmann<\/strong><\/p>\n Sara Holzmann is Project Manager in the Sustainable Social Market Economy program at the Bertelsmann Stiftung. She works on issues of environmental economics and climate policy in the context of the transition to a climate-neutral society and economy.<\/p>\n Read more on EU Climate Policy Trade Policy in the Context of Internalizing Externalities<\/a><\/p>\n How to Fund Climate Investments in Times of Budget Consolidations<\/a><\/p>\n\n
Free allocation of emission allowances protects EU industry from carbon leakage<\/h2>\n
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<\/p>\nThe CBAM is supposed to combine climate and industry protection<\/h2>\n
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The treatment of exports remains the big controversy<\/h2>\n
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<\/a><\/p>\nExport rebates are the political and legal pitfall of the CBAM<\/h2>\n
Subsidies and international cooperation are needed<\/h2>\n
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