Carbon Border Adjustment

POSITION | EXTERNAL ECONOMIC POLICY | ENERGY AND CLIMATE POLICY

Carbon Border Adjustment

May 2020 Key Points ▪

23. Oktober German industry supports the targets laid down in the Paris Agreement. Closer cooperation of all countries will be indispensable for effective protection of the climate.

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Discrepancies between countries’ ambitions to protect the climate are currently growing. If companies in the EU do more to protect the climate than companies do elsewhere they will need extended carbon leakage protection. The latter together with additional technology-neutral measures and incentives are necessary to render possible investments and innovations indispensable for realising the Green Deal.

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If the conventional instruments, free allocation and indirect cost compensation, do not provide sufficient carbon leakage protection, carbon border adjustment (CBAM) and other protective mechanisms could be explored without prejudice.

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Such measures need to be WTO compatible and should be implemented in a practicable way.

Internationally agreed application of these measures will be important to avoid new trade disputes.

However, many German industries harbour strong reservations against CBAMs.

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CBAMs cannot replace free allocation and indirect cost compensation; CBAMs can be supplemental at best.

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Without comprehensive impact assessments, no legislative proposals should be brought forward.

Answers are needed to questions concerning practicability, impact on complex value chains and networks, on trade relations/ exports etc. The compilation and verification of Product Carbon Footprints will not be possible for many products.

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A robust and concrete EU industrial strategy is a must. State aid rules and innovation settings are not compatible with the challenges brought up by the Green Deal. In many policy areas the rules will need to be improved.

Eckart von Unger | BDI Department External Economic Policy | T: +3227921020 | e.vonunger@bdi.eu | www.bdi.eu Dr. Joachim Hein | BDI Department Energy and Climate Policy | T: +49 30 20281555 | j.hein@bdi.eu | www.bdi.eu

2017

Carbon Border Adjustment

German industry supports the targets laid down in the Paris Agreement. Achieving the target of EU’s Green Deal (i.e. climate-neutral Europe by 2050) will help the global climate only if all countries’ contributions are ambitious. Closer cooperation of all countries will be indispensable for effective protection of the climate. Harmonised carbon pricing at G20 level would deliver a substantial contribution. If the EU unilaterally strengthens its climate targets, existing discrepancies between countries’ ambitions will widen more. In any case, German consumers and companies already shoulder a heavy extra-burden due to the energy transition.

Together with increasing CO2 costs, the expected decrease in free allocation and further cuts in the indirect cost compensation will make stronger protection from carbon leakage necessary. Without extended carbon leakage protection international competitors in countries with lower climate protection standards will jeopardise the existence of whole industry branches in Europe. German industry points out that relocating industrial production to regions with lower climate protection standards harms Europe as an industrial production site and contradicts global climate protection.

Transforming our way of living towards CO2 neutrality is a task for the entire society. Our industries support this transformation, not least because they expect it to create new markets and impetus for investments. The industries will not be able to shoulder this extraordinary transformational burden on their own; they do require additional support. According to the European Green Deal (EGD), to promote rebuilding our societies, the European Commission during this term of office must decide on new technology-neutral measures and incentives to generate the necessary freedom and support for investments and innovation.

CBAM, according to the BDI, are strictly conditional on WTO compatibility and practicability. A WTOcompatible design comes with considerable obstacles and will most likely necessitate the compilation and verification of Product Carbon Footprints for many products at home and abroad. This will require categorising products in a generally accepted and easily to handle way based on the carbon intensity of their production modes. Such a method does not exist yet and must be developed. No disproportionate bureaucratic burden should be imposed on administration and business. A symmetric mechanism where imported products are charged based on their CO2 footprint needs to compensate this charge when products are exported. This symmetry is necessary to avoid competitive disadvantages to European industries producing for export markets. No additional burden must be imposed on European production. The carbon leakage risk cannot simply be “handed down” to other parts of the value chain. Negative impacts on downstream industries and disruptions in international value chains must be prevented.

In no way can CBAMs replace the free allocation and the electricity price compensation. Therefore, many German industries harbour strong reservations against CBAMs. A thorough and comprehensive impact assessment (IA) is indispensable prior to any legislative proposal on the part of the Commission.

Together with various designs of CBAMs, the IA should analyse additional carbon leakage protection instruments that could be added to the existing system of carbon leakage protection to better support the industries’ transformations. Furthermore, the IA should for several alternative instruments extensively evaluate practicability, potential impacts on complex value chains and networks, and the impact on export conditions for businesses.

Retaliatory measures from third states must be avoided. The EU and its Member States, therefore, should intensify their dialogue with international partners. Carbon leakage protection, e.g. through CBAMs, must not lead to protectionism and new trade disputes.

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Carbon Border Adjustment

The European Commission should flank the EGD with a strong and concrete industrial strategy including effective measures that allow companies to successfully compete on international markets while protecting the climate. Losses in industrial value creation must be avoided. Existing measures to prevent carbon leakage (e.g. free allocation and electricity price compensation) need to be preserved in any case, complemented by new instruments. Given the unprecedented challenges of the Green Deal, the framework conditions (e.g. better innovation environment, EU-wide harmonised industry-specific power prices) should be considerably improved. These conditions play a decisive role for preserving competitiveness during the transformation. In this vein, state aid rules need to be revised.

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Contact Eckart von Unger T: +32 2 7921020 e.vonunger@bdi.eu Dr. Joachim Hein T: +49 30 20281555 j.hein@bdi.eu BDI Document Number: D 1182

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