CBAM, or how to prevent Fit for 55 from becoming Europe’s economic suicide

The Fit for 55 package needs to be considered as a collection of regulations that will change the EU economy. The mechanism that will tax CO2 emissions outside of the European Union – CBAM, is to protect Europe against an economic suicide. It may also be an opportunity for Poland – Wojciech Jakóbik, editor in chief at BiznesAlert.pl writes.

CBAM, or how to tackle emissions outside the EU

Previously I wrote a piece where I explained that if the Fit for 55 package lacks the right calculations and mechanisms that will compensate for the levies imposed on fossil fuels, the ambitious project may kill Europe’s economic growth instead of putting it on the green track to success. In other words, Europe needs to tread cautiously to not throw the baby away with the bathwater. One of the elements of the Fit for 55 package is CBAM, which is a sine qua non condition for the success of the EU’s vision for economic development on the international arena. The acronym stands for the Carbon Border Adjustment Mechanism. The mechanism will impose levies on goods imported to the EU, depending on the amount of CO2 emissions generated during their manufacturing. The goal is to even out the playing field for European businesses that need to pay for the EU CO2 emissions trading system, since they will have to compete against non-European companies that so far have not had to pay for CO2 allowances. The CBAM rate will depend on the price of CO2 allowances. The details on this are to be presented by the end of the year.

The idea has been already criticized by the EU’s foreign partners. Australia, China and Ukraine claim it will be used to unfairly undermine competition. Beijing has already announced it would fight with CBAM at the World Trade Organization. The proponents of this solution argue that they will be able to reconcile it with free trade rules. The US and Russia have expressed a more moderate approach to the issue, and they are trying to negotiate with Brussels. The CBAM will not be imposed on economies that will implement their own climate policies that are akin to the one in Europe. This is the EU’s way of encouraging its partners to follow its green path. A scenario that is optimistic from the point of view of Brussels says that CBAM will not be imposed on countries that will cooperate, and that the products they export to the EU will be manufactured with adherence to higher standards. While states that will reject the climate policy will pay increasingly more, until they are convinced that it’s better to protect the climate. The pessimistic scenario will result in Europe’s economic suicide, as nobody will follow it. The debate on the CBAM may last until 2024.

Foreign cooperation or economic suicide

The hope for reaching an understanding first came from the US, where President Joe Biden has declared the country would achieve climate neutrality by 2050, invest billions in green technologies as part of the Environmental Justice and Equitable Economic Opportunity Plan, as well as introduce its own version of CBAM, i.e. the Carbon Border Adjustment. However, Biden has never promised to introduce a CO2 emissions trading system similar to the EU ETS, and until such a system is introduced, American businesses will be liable to CBAM. An emissions trading system is present in eleven states on the East Coast (RGGI) and California, which has introduced its own CBA. However, it is worth stressing that the price of an allowance in the Golden State is about USD 18 per ton, while CO2 emissions in Europe are breaking records, exceeding EUR 50, which is about USD 60, three times as much as the price in California. The Russians have also taken steps to adapt their policy to the expectations of the European Commission. The Ministry of Economic Development has estimated that CBAM will cost Russia EUR 3.6 billion a year as of 2035, but according to Vygon Consulting this is an overestimation. In July, in a move to lower the emissions generated by their economy, Russians introduced a voluntary emissions trading system. We wrote about this on BiznesAlert.pl. Russia will negotiate a discount tariff, the ability to compensate for its emissions with green projects. The relationship Russia will have with the EU climate policy will be marked by issues related to security and foreign policy, just like it is in the case of the hydrocarbon sector, a problem I wrote about elsewhere. China has also launched a CO2 trading system pilot project, which does not match the ambitions of the one in Europe, but nevertheless it is the first step on its way to follow the European path. On the other hand, Beijing has already announced it would fight CBAM on the forum of the World Trade Organization.

If Europe manages to use CBAM to convince its international partners to introduce a more ambitious climate policy, the burdens imposed in result of the Fit for 55 within the EU borders will not be as onerous for its member states when competing with other global powers. However, if it turns out that the Europeans will be the only ones that stick to their ambitions, they will commit an economic suicide by thwarting economic development instead of stoking it. The optimism of the planners responsible for the EC policy stems from the fact that the long running subsidies for renewables have made it possible to lower the cost of this technology so much, that now it is developing freely, and Europe is leading the way when it comes to promoting it. The same fate is said to await energy storage technologies, hydrogen and other green solutions that will be promoted in the Fit for 55.

CBAM and Poland

A compromise would involve bankrolling the energy transition with money acquired through CBAM. While financing the status quo in the conventional energy sector is off the table, one could imagine a situation where CBAM could subsidize new solidarity mechanisms to support the transition in countries that need it the most, such as Poland. It would add another source of money for the energy transition, next to the Modernization Fund and other pools from the EU ETS. The scale of challenges proposed in Fit for 55 means that the new solution should not replace, but complement the old one in a way that will prevent us from throwing the baby out with the bathwater.

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