The U.S. response to the EU CBAM: Past responses and future prospects
On this podcast episode, Kellie interviews Ann-Evelyn Luyten, and they talk about her recent TE blog “The U.S. response to the EU CBAM: Past responses and future prospects,” in which she explains the three different approaches that the U.S. could take in the near future in response to the EU Carbon Border Adjustment Mechanism. Ann-Evelyn also refers to the recent legislative developments on the EU CBAM.
Kellie: Hello and welcome to the TradeExperettes podcast. My name is Kelly Kemock and on today's episode, we have Ann-Evelyn Luyten who is an EU policy expert who previously worked at EU trade associations and at the World Trade Organization. Ann is going to be talking to us about her TradeExperettes blog published recently, titled "The U.S. Response to the EU CBAM: past responses and future prospects," and she'll give us an update on the recent legislative developments for the CBAM, which is the carbon border adjustment mechanism.
Thank you Ann-Evelyn for joining us, we are so thankful to have you on today's podcast. Thank you so much.
Ann-Evelyn: Thank you, first of all, for having me and for inviting me trade expert has been a great platform for me to connect to women who are experts in trade.
Kellie: We are so happy to have you. Thank you so much. So if you could start off with maybe a brief introduction of yourself and maybe a brief introduction about the, you see that.
Ann-Evelyn: Yes, of course. So just to briefly introduce myself, after finishing my studies at KU Leuven in Belgium and the University of Geneva, I worked in several international organizations in Geneva, including the world trade organization. Where I worked as an economic first officer and a training officer. Afterwards I came back to Brussels where I'm closely following EU trade policy, and currently I'm working at an American company as an EU policy expert.
Kellie: Excellent. And if you could, can you give us a primer on the EU CBAM proposal and what got you interested in focusing on that legislation in particular?
Ann-Evelyn: Sure. So in July, 2021, the European commission released a legislative proposal for a carbon border adjustment mechanism, also known, as you said, as CBAM as part of its Green Deal package. So the CBM is one of the proposed tools to achieve the European Union's climate targets. This means reducing the EU's carbon emissions by 55% compared to 1990 levels by the end of this decade, and also to become carbon neutral by 2050. So in essence, the CBAM is a measure that would be applied at the EU border on imports to adjust carbon pricing in the country where those goods are coming from. So when compared with the carbon pricing under the EU's emissions trading system, also known as ETS, and under the commission's proposal EU importers must purchase CBAM certificates, and this must be equal to the total embedded emissions of imported goods before putting targeted goods on the new markets. But due to practical concerns, only five emissions intensive sectors are targeted in the current proposal. So namely: cement, iron, steel, aluminum, fertilizers and electricity. But, uh, the ultimate objective of the EU is a broad product coverage of the CBAM, so the EU will consider a broadening of the CBAM scope in terms of targeted sectors, but also indirect emissions, transportation services and downstream industries before 2026.
CBAM certificates can be reduced to reflect the carbon prices already paid in the country of origin, so for example, countries with their own ETS, but this needs to be certified by an independent person. Countries that adopted the EU ETS, so Iceland, Norway, Lichtenstein, or are linked with the EU's ETS, like Switzerland, are exempted from the CBAM. So the EU will further elaborate a mechanism for other third countries to be exempted in the future. Regarding the timeline the CBAM would enter into force from 2023 until 2025 in a transitional form, EU importers would be required to report the embedded emissions in imported goods. From 2026 the CBAM would enter fully into force and importers would be obliged to purchase CBAM certificates.
Currently, the CBAM is undergoing the EU's legislative process, so the final text will have to be agreed by the European Parliament and the Council, which consists of EU member states. So both institutions are currently reviewing the commission's proposal and will present their final positions in the coming weeks.
Kellie: Have there been any new developments of its review by the European parliament during the last months?
Ann-Evelyn: As I briefly mentioned in my blog, Mohammed Chahim who is the lead rapporteur on CBAM at a European Parliament's Environment Committee prepared a draft report on the commission's proposal with amendments. So, in January the draft report was shared with shadow rapporteurs in the parliament for discussion. So his draft report proposes five major changes to the commission's proposal. The draft report states that the scope of the CBAM should be broadened to organic chemicals, hydrogen, and polymer because of their carbon and trade intensity. Further, the report states that indirect emissions, such as emissions from electricity should also be covered by CBAM after the pilot phase. There was also a need for a foster facing of CBAM and a foster face out of free allowances. And while the European Commission foresees a decentralized system, with 27 CBAM authorities, the draft report suggests a centralized system with one CBAM authority. And lastly, the report points out that there is a need to avoid that CBAM affects least developing countries disproportionately. And there's also a need to support de-carbonization in these countries. So, therefore, the EU needs to provide financial support for this. Regarding the next steps in the European Parliament the draft report is expected to be discussed in the Parliament and voted on in the Parliament's Environment Committee on 11 May. This will lead to the negotiation position of the parliament which will ultimately shape the EU CBAM. So this was the parliament side, there's also a small update from the council side. On 15 March, the EU council adopted a general approach on CBAM, they propose, for instance, additional inclusion of a few specific aluminum products in the scope of CBAM, but also a broader penalty system and a more explicit definition of the term circumvention.
Kellie: So then, in the blog, you mention three scenarios of U.S. responses to the EU CBAM proposal: first would be the U.S. questioning the WTO compatibility of the mechanism, and then two would be the U.S. introducing its own carbon border tax, or three, you mentioned participating in a carbon club. Could you tell us more about these three different approaches and which one might be more plausible considering these recent developments?
Ann-Evelyn: Yes, so as a first option, U.S. could choose to take it negative position against the EU CBAM, so U.S signaled that it could take this approach when it expressed its concern on the CBAM at the WTO, and, in addition, in March, 2021, John Kerry, the U.S. Climate Envoy, stated that the EU should only consider introducing the CBAM as a last resort. So given these signals, the U.S. Is likely to continue to use the WTO as a platform to question the CBAM's compatibility with the WTO rules.
As a second option, but more in the long run, the U.S. may eventually introduce its own carbon border tax after all. In December, 2021, Kerry stressed that president Biden had instructed officials to evaluate all the implications of the EU CBAM. The U.S. is exploring whether to put in place its own carbon border mechanism. Kerry also mentioned that it may be a tool that the U.S. could employ if other countries are not serious enough in reducing carbon emissions. So this indicates that the U.S. may introduce its own carbon border adjustment mechanism. Besides that in July, 2021, Senator Chris Coons and Representative Scott Peters from the democratic party introduced companion bills in the Senate Committee on Finance and the House of Representatives Committee on Ways and Needs. These companion bills would impose a border carbon adjustment fee on imports of carbon intensive goods into the U S. Under the democratic proposal, a tariff would start in 2024 and would apply to roughly 12% of imports coming into the U.S., and would target petroleum, natural gas, coal, aluminum, steel, iron and cement. So, while the proposal has not advanced out of committee in either chamber, this may change in the future, and in the meantime, President Biden has continued to signal potential support for a carbon border adjustment.
Another option that I mentioned in my blog, for the U.S. is to participate in a Carbon Club. So according to William Nordhaus, who is a Nobel laureate, a club of countries that implement a carbon pricing system should agree on an international target carbon price. So while countries who are a member of the carbon club will not face any tariffs, other countries who choose not to join the club will phase unilateral tariffs apply to all their exports into the club. So if, for example, the EU, the U.S. and China succeed in creating a carbon club together with other economies, it will open up an avenue for attaining higher climate ambitions. However, there are no signs of concrete actions from these economies to create such a club, but China mentioned plans for closer cooperation with the U.S. on climate issues at COP-26. So based on the latest developments, I think that in the long run, the U.S. may, eventually, introduce its own carbon border adjustments. It seems that more and more Republicans are getting behind the idea of a carbon border tax, but where the EU sees CBAM as a climate measure, many Americans see a carbon border tax also as a tool to create a level playing field between the U.S. and, for example, Chinese producers.
Kellie: It's all very interesting to me, I think that was an excellent explanation, and I learned a lot. We'll pass on to the last question here, um, at the WTO, some members have undertaken discussions on the CBAM issue under the framework of the trade and environmental sustainability structured discussions. What's your view about the prospects of this topic at the WTO?
Ann-Evelyn: So in the long term, I think the WTO TESSD, together with UN-COP could be a good place for countries to discuss and possibly agree on multilateral rules on CBAM. I think, particularly, the WTO Technical Barriers to Trade Agreement can contribute to effective policies on carbon emissions standards and climate change mitigation. So in this regard, the WTO published a paper in March 2022. In essence, the paper raises three points: first, the paper states that using different standards for measuring carbon emissions makes comparisons difficult. So aligning a methodology for measurements may contribute to achieving climate goals by enabling fair comparisons. These efforts can be supported by WTO rules and recommendations on standards and regulations, namely the technical barriers to trade agreement.
Secondly, the paper states that robust verification is important. So it is essential that information provided by producers about carbon content of products and processes is verified. Confidence should be fostered by also engaging with trading partners. And further, WTO Committee work can serve as a forum for early dialogue on emerging regulations on verification to address climate change.
So this cooperation helps to facilitate the transition towards a low carbon economy and to avoid unproductive trade friction, and, lastly, given how technical the fields of carbon emissions quantification can be, it is important to provide support to developing countries so that they can accurately measure and verify the carbon contents of their products. Straightening national quality infrastructure in developing countries can help producers to integrate into a green, global value chain. However, to conclude, given that there is no harmonization on calculating carbon emissions at the moment, I think it might take a long time to reach global harmonization.
Kellie: Absolutely. That was actually one of my questions. I made a mental note to research this after talking with you, because I wanted to find out if there was any sort of guidance on how the level of emissions would even be calculated. Right. So depending on the impact level that determines the level of tax potentially, how is that even measured? What kind of calculation are we looking at for importers to calculate that?
Ann-Evelyn: Unfortunately there's no guidance yet. I think also because the CBAM needs to come out, I mean the legislative process is still ongoing. So, I think maybe after that, there might be an example for other countries, but for now there's no harmonization.
Kellie: Thank you so much for your insight today, and as these things are going to be developing, we should have you back and give us an update in the next few months.
Ann-Evelyn: Thank you very much for having me.
Kellie: Great, thank you! That was Ann-Evelyn Luyten talking about the European CBAM blog episode that was recently published on the TradeExperettes Blog.
The TradeExperettes podcast is hosted by me, Kelly Kemock and Belén Gracia is our executive producer. If you would like to know more about the TradeExperettes, you can find us online at tradeexperts.org at LinkedIn and on Twitter.
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