London — Free allocation of carbon dioxide allowances under the EU Emissions Trading System should continue while a proposed Carbon Border Adjustment Mechanism is introduced, major industry association BusinessEurope said March 8.
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The call comes as EU lawmakers debate a proposed CBAM ahead of a European Parliament plenary vote March 10, in a measure that could impact the economics of international trade in carbon-intensive goods.
"We are looking closely into the idea of a Carbon Border Adjustment Mechanism," said BusinessEurope Director General Markus J. Beyrer in a statement.
While the scope and impact will depend on the chosen design of the measure, World Trade Organization compatibility will be essential to engage the EU's trading partners to match the bloc's climate ambition and to minimize the risk of harmful retaliatory measures, he said.
"Most importantly, we must ensure our companies' competitiveness by maintaining existing measures, like the free allowances under the EU ETS, at least as long as the new mechanism is in a testing phase and has not yet proven its effectiveness," said Beyrer.
Brussels-based BusinessEurope is the largest European association for businesses, with members including many of the main national industry associations among its 35 member countries.
The CBAM is expected to take the form of a charge levied on the carbon content of goods imported into the EU from countries with less ambitious climate rules than the EU's.
The mechanism seeks to protect European industry from competitive distortions arising from the EU ETS as well as encouraging the bloc's trading partners to adopt equivalent ambition on reducing CO2 emissions.
"If we fail to maintain competitiveness while introducing ambitious climate measures, it will be hard to convince other countries to choose the same path," said Beyrer.
Since free allocation of carbon allowances and a proposed CBAM are intended to achieve the same goal, EU regulators are expected to phase out free allowances eventually for sectors covered by the border measure.
However, BusinessEurope argued that this should not be applied instantaneously, at least for a period until the effectiveness of the CBAM has been assessed.
A spokesman for the center-right European People's Party – the largest group of lawmakers in the European parliament – said the group was "strongly in favor" of the CBAM and also backed ongoing free allowances for affected sectors.
"We would like to maintain this free allocation while the border mechanism is introduced and until its effectiveness has been established," the spokesman said in a web-streamed briefing March 8.
The CBAM is expected to cover most emissions-intensive sectors of the EU economy, including steel, cement and electricity, according to lawmakers in the parliament's environment committee.
"The new mechanism should align with World Trade Organization rules and encourage the decarbonization of EU and non-EU industries. It will also become part of the EU's future industrial strategy," the EU Parliament said in a statement March 8.
To avoid falling foul of WTO rules, the CBAM is expected to be calculated based on the carbon price under the EU ETS, to ensure equal treatment of EU and non-EU companies.
By 2023, the CBAM should cover power and energy-intensive industrial sectors, which represent 94% of the EU's industrial emissions and which still receive substantial free carbon allowances, according to EU lawmakers.
The EU's executive arm, the European Commission, is expected to make a legislative proposal for a CBAM in the second quarter of 2021, alongside a review of the EU ETS to align the system with the bloc's renewed 2030 greenhouse gas emissions reduction target of 55% below 1990 levels.
The proposed measure needs the support of the EU Parliament and Member States in the EU Council to become law.