The European Union is going on the green offensive with new rules that may force the rest of the world to be more sustainable.
When the EU decided that rules and regulations would need to be implemented to reduce the amount of greenhouse gases being pumped into the atmosphere, one glaring problem quickly became apparent.
The bloc’s legal reach for the most part only extends to its external borders, meaning that companies and businesses could opt to escape all of those well-meaning but expensive green requirements by setting up shop somewhere else.
This phenomenon is called carbon leakage and in a bid to prevent it, the EU devised a new policy called the carbon border adjustment mechanism, known in the energy and climate space now by its acronym, CBAM.
CBAM will impose extra charges on certain imported products that do not meet the EU’s strict standards. Steel and iron, for example, produced outside of the bloc, using dirty coal as a feedstock, will have to pay extra so as not to undercut greener alternatives.
This anti-climate-dumping tool has therefore two objectives: firstly, to prevent the EU’s domestic green economy from being suffocated by cheap and nasty imports, and, secondly, to give non-EU countries a financial incentive to also implement climate policies.
It has already started having a tangible impact on how the world does business. Although some big polluting countries have complained about CBAM, some have also started laying the groundwork for their own policies that will mitigate the financial damage.
Aside from investing in green steel, low carbon cement and other green industrial processes that will be exempt from CBAM charges, non-EU countries also have another option open to them.
Under the policy’s rules, imports that have already been subjected to carbon pricing should not be charged again. Double-jeopardy rules will apply in the climate space as well, but there is a large burden of proof on the exporters to show it.
In an ideal world, country A will have a carbon market that is comparable to the EU’s emissions trading system, which imposes on most heavy industries a market-defined cost per tonne of CO2 released.
If products coming from country A into the EU are subject to these charges, then CBAM will be stood down and business can continue as usual. This is why countries like Turkey are bringing forward their plans to launch their own carbon market.
Rumours doing the rounds in Brussels this week suggest that the EU is considering making this policy choice even more easy to make for trading partners, by tweaking CBAM’s rules to punish exporters from countries without an ETS.
If these rules are adopted, it would mean that any country that does not have a comparable carbon market would be subject to emission values that are essentially set by Brussels. Products would be assigned standard, average CO2 figures and charges levied based on those.
That would mean that even companies that are taking steps to decarbonise their production processes would be penalised, as they would not be able to prove their green credentials.
This might be a risky strategy for the EU, as CBAM is already walking a thin line between legality and illegality. There are many that believe it breaches World Trade Organisation principles and a rule change along these lines might lend credence to those claims.
Brussels continues to insist that it is WTO-compliant and its top trade law experts will undoubtedly be going through any proposals with a fine-tooth comb.
Regardless of the legal nuances of the policy though, EU officials should be commended for going on the offensive for once and leveraging one of the most successful aspects of Brussels policymaking for global good.
The next tangible example of this in action could well be a decision before the end of the year on linking the carbon markets of the EU and the United Kingdom, as the latter is keen to avoid any CBAM charges on cross-Channel electricity trades.
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