2023-04-18 06:30:14
On the negotiating table for 15 years, carbon taxation at European borders was the subject of an agreement last December. The mechanism will gradually be put in place, making it necessary to quantify and reduce the CO2 emissions caused by the import of products into Europe.
Passed relatively unnoticed at the end of 2022, a European novelty will have an effect on international trade and its climate impact: the establishment of a carbon border adjustment mechanism (MACF or CBAM in English for Carbon Border Adjustment Mechanism ). Planned to be put in place gradually, this mechanism will materialize a 15-year-old project. Indeed, since 2006, France has promoted the idea of a “carbon” tax on products imported into Europe. This border tax was designed to give a cost to CO2 emitted in countries outside the Union, while at the time, Europe was just starting its internal carbon market, the famous ETS (European Trading Scheme). Nicolas Sarkozy had defended the idea several times, with the argument that “those who produce dirty must pay”, and especially so that European industrialists do not find themselves too disadvantaged in the face of global competition less constrained by this type of environmental regulation. .
Risk of carbon leakage
How will this carbon border adjustment mechanism work? To understand this, we have to go back to the way the ETS is structured and has evolved to become the most ambitious carbon market in the world – it covers 39% of European Union emissions – and the one where the price level of carbon is the highest. “Created in 2005, the ETS brings about a carbon price in two stages. First, there is an initial allocation of CO allowances2 for each entity subject to the ETS: this allocation was first free and then went through an auction, which created the primary market price. Then there is a final allocation during the trading of allowances between participants, depending on whether they have too much or not enough in relation to the greenhouse gas emissions they must compensate, which generates the secondary market price. » explains Marc Baudry, university professor and head of the “CO pricing” unit2 and carbon innovation” at the Climate Economics Chair. If we look at all of the manufacturers subject to the ETS, each transfer to these markets has a cost, in addition to the abatement cost, ie that of the effort to reduce its emissions. To limit these costs, part of it can be passed on to consumers. If this is not possible, particularly in the event of strong international competition, the system takes the risk of seeing the appearance of “carbon leakage”: this is the main name given to the phenomena of relocation of industrialists to countries not subject to the carbon constraint. , and the purchase of cheaper imported products from these same countries. But there are other forms detailed by Marc Baudry and Aliénor Cameron in an article recently published by these two researchers from the Climate Economics Chair.
“Without international coordination, this carbon leakage reduces the effectiveness of the European Union’s climate policy. The free allocation of quotas limited this risk of leaks, in particular relocations, during phase II (2008-2012) and phase III (2013-2020) of the ETS. But now, in phase IV (2021-2030), with quota auctions and the increase in climate objectives, the market has regained credibility and we see the spot price vary around €80/tCO2. The risk of leaks is becoming greater, so there is a need for this carbon border adjustment mechanism, and to think about maintaining the competitiveness of European manufacturers. analyzes Anna Creti, full professor at Paris Dauphine University and director of the Climate Economics Chair.
Comply with WTO rules
If the establishment of the MACF has taken so long, it is because the mechanism directly corrects the terms of trade, thus putting itself in danger vis-à-vis the World Trade Organization. To be compatible with WTO rules, the mechanism must therefore create a constraint on products without targeting specific countries. It must act only on imports without creating export subsidies for European companies, and it must ensure that regulation affects local products on the European internal market as much as imported products.
To comply with these rules, the carbon border adjustment mechanism will:
- gradually put an end to the free allocation of allowances in the ETS to have only forward auctions (see diagram);
- cover imports from a first panel of sectors already subject to the ETS (fertilizers, aluminium, steel, cement, electricity, hydrogen) before extending it to others;
- ask the companies concerned outside Europe to count the greenhouse gas emissions per unit of product imported during the transitional period 2023-2025;
- make these same companies pay the price of the carbon content of products imported into Europe during the following period (2026-2035). It will not be a customs tariff subject to discretionary power, because the price level will be that observed on the spot market of the ETS.
Following the Green Deal and the launch of the Fit for 55 package reforms by the European Commission, the MACF is on track and the transitional phase should really start in October 2023. Several aspects will need to be monitored. If non-EU companies subject to the MACF do not have to acquire allowances on the ETS, they must nevertheless properly account for their emissions, which will require a certain rigor (benchmark, control). There is also the question of “reshuffling”, i.e. shifting carbon leakage downstream from the value chains: this could be, for example, a drop in steel imports subject to the MACF by deferring them to imports of finished products (such as piping) which are not subject to it. “It is expected to imagine this phenomenon, for which we can design additional mechanisms if necessary. It seems to me more important to gauge the impact of the MACF on the smallest developing countries: if necessary, under the principle of common but differentiated responsibilities of the Paris Agreement, part of the revenue from the mechanism could be devoted to the decarbonization assistance fund for developing countries” says Anna Creti. And the specialist adds that we must above all see the positive aspect of the carbon border adjustment mechanism: it will encourage companies outside the EU to reduce the carbon content of their products by 2026; and, by ending free allocations from the ETS, it will push for the acceleration of decarbonisation in the European Union.
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