Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The European Union has targeted to reach net-zero emissions by
2050. For European industry, which has had relatively stable
emissions over the last decade, this has profound implications.
Massive investments in energy efficiency, new production techniques
and adaptation to low-carbon fuels will be required to reduce
emissions quickly.
Even as Europe seeks to cut emissions, it also wants its
industry to remain competitive on the global stage, and to continue
to provide jobs. This is every bit as high a priority as the
climate target. To support industrial firms as they embark on
complex and expensive decarbonization programs, Europe plans to
introduce an as-yet undefined tax on some high-carbon imports—a
so-called Carbon Border Adjustment Mechanism (CBAM). A CBAM is also
being touted as a means of driving decarbonization beyond Europe's
borders, and of giving the European Union an additional source of
funding.
IHS Markit recently issued a report delving into the options of
the CBAM and its prospects, four main conclusions stand out:
The likely shape of a CBAM? Various concepts
have been proposed for a CBAM, with speculation rife and facts few
and far between. Reading the tea leaves in Brussels suggests it is
very likely to end up as an import duty pegged to the price of
carbon allowances on Europe's carbon market (EUAs). In IHS Markit's
view, the key questions which shape the impact and effectiveness of
the CBAM:
Which industrial sectors will be included in the first
iteration of the CBAM?
Which countries will be covered, and which exempted—and on
what basis?
How precisely will the carbon intensity of imported products be
determined?
What mechanisms will be put in place for monitoring,
verification, and reporting?
How will the CBAM interact with the planned reform of the EU
Emissions Trading System?
A Herculean challenge. Achieving internal
agreement on the details of a CBAM will be extraordinarily
difficult given the national and industrial interests at stake.
Aligning the new mechanism with World Trade Organization (WTO)
rules and dealing with inevitable pushback from trading partners
will complicate matters further. IHS Markit believes that a
slimmed-down CBAM could be introduced by 2025 at the earliest.
Europe, a regulatory superpower for emissions?
EU officials have stated that no CBAM will be applied to countries
with decarbonization programs that meet certain (as yet undefined)
criteria. The ability to grant exemptions will, in theory, give the
EU influence to shape policies around the world—while adding
another layer of complexity to the implementation of a CBAM.
Failure is not an option. Despite the massive
challenges that the European Union will face in developing and
implementing a CBAM, EU leaders see no alternative way of meeting
climate targets without threatening European industry.
