Environmental Law and Policy: Carbon Border Adjustments and EU CBAM

Università della Svizzera italiana Environmental Law and Policy

Lecture 7 - Carbon Border Adjustments (CBAs)

Prof. Dr. Ilaria Espa Academic year 2024/2025 - Spring Semester

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Lecture 7 - Carbon Border Adjustments (CBAs) Learning Objectives

Learn concepts

• Explain what are carbon border adjustment mechanisms and related policies
• Explain the novel features of the EU CBAM scheme
• Explain the differences between EU CBAM and USA CBA policies

Learn how to apply concepts:

• Assess the main strengths and weaknesses of the EU CBAM scheme
• Assess the compatibility of CBAM schemes under the relevant WTO laws
• Assess the compatibility of BCAs with the CBDR principle

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Lecture 7 - Carbon Border Adjustments (CBAs) Outline

1. Carbon Border Adjustments (CBAs)
   1. Introduction
   2. Hurdles to CBAs
   3. Compatibilty with WTO law
   4. Applicable WTO rules
2. Regional Focus: EU Carbon Border Adjustment Mechanism (CBAM)
   1. Introduction
   2. Sectoral Coverage
   3. Brief Timeline
   4. Gradual Phase In
   5. What Does it Mean for the Importers in the EU?
   6. Correction Mechanisms
   7. Latest Omnibus Package
3. Regional Focus: USA Carbon Pricing Policies
   1. Recent Developments
4. Concluding Remarks

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Carbon Border Adjustments: 1.1 Introduction

Carbon Border Adjustments (CBAs) or Carbon Border Adjustment Mechanism (CBAMs) seek to achieve symmetry in the treatment of domestic and foreign products by including imports in the scope of a carbon pricing instruments.

• A complement to unilateral climate policies. May be associated to any carbon pricing instruments. BCAs are ambiguous in that they can address different concerns Competitiveness concerns > levelling the field
• Carbon leakage concerns → preserving the mitigation (environmental) potential of domestic carbon pricing, to everyone's benefit.

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Hurdles to Carbon Border Adjustments

Repeatedly proposed, but rarely implemented Economic efficiency > economic literature often overlook trade agreements when promoting BCAs for efficiency. Political resistance > Governments frequently cite WTO rules as a reason not to implement BCAs. Legal uncertainity> no settled WTO guidance, but compatibility depends on legal design. Technical & administrative hurdles > Even if legal, CBAs can be technically complex and costly to administer. But .. The EU CBAM as a complement to the EU ETS > NOW approved!

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Compatibility with WTO Law

As trade-related policy instruments, CBAMs are subject to WTO rules In technical jargon, non-product related processes and production methods (nprPPMs) measures. Extraterritorial effects. Actual compatibility with WTO law to be assessed on a case-by-case basis depending on a number of design features. Scope and coverage, adjustment level, revenue use, expiration, process.

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Applicable WTO Rules

Non-discrimination obligations > any imports to be treated not less favourably than national (in casu, EU) like products. National treatment (Article III GATT) and MFN (Article | GATT) -> issue lies in the correct determination of carbon content. Environmental exceptions> policy space left to pursue sufficiently flexible measures rationally connected with a legitimate goal. Public health exception > Article XX (b) GATT. Exhaustible natural resources conservation exception > Article XX(g). Chapeau > measure must not be applied "in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade". WTO compatibility is uncertain, but cannot be excluded.

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Regional Focus: The EU CBAM

0 The CBAM as a multi-purpose measure enables the EU to:

• address competitiveness concerns and avoid carbon leakage. level the playing field.
• raise EU climate policy ambition.
• target consumption emissions.
• nudge other countries to restrict emissions.
• generate revenues.

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The EU CBAM: 2.1 Introduction

How does the CBAM work? In theory, a 'mirroring' instrument' meant to work in parallel to the EU ETS Alternative to free allocation of allowances. In practice, many differences leading to increasing complexity and high compliance costs. Sectoral coverage. Price of CBAM 'certificates' vs EUAs. Calculation of embedded carbon content in covered goods. Correction mechanisms.

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The EU CBAM: 2.2 Sectoral Coverage

Cement 2523 10 00, 2523 21, 2523 29 00, 2523 90 00 Electricity 2716 00 00 Chemicals: hydrogen 2804 10000 Fertilizers 2808 00 00, 2814, 2834 21 00, 3102, 3105 (except 3105 60 00) Iron and Steel 72 (except 7202 and 7204), 7301, 7302, 7303 00, 7304, 7305, 7306, 7307, 7308 (excluding prefabricated buildings of heading 9406), 7309, 7310, 7311 Aluminum 7601, 7603, 7604, 7605, 7606, 7607, 7608, 7609 00 00 Direct emissions (and indirect emissions > simple vs complex goods!) Payments will be calculated based on the actual level emissions. If actual emissions are not known, default values will be used.

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The EU CBAM: 2.2 Sectoral Coverage - Default Values

But the default values are punitive! Products other than electricity Elettricity Preference for actual embedded emissions Preference for default values based on: 1) average CO2 emission factor in third country, group of third countries countries, or region 2) if 1) not possible, CO2 emission factor in the EU (of fossil fuels only) If not possible, default values: 1) Average emission intensity of each exporting country, increased by a mark-up 2) if 1) not possible, average of 10% worst performing EU installations Authorised declarants may choose to determine actual embedded emissions upon certain conditions

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The EU CBAM: 2.3 Brief Timeline

CBAM Gradual implementation of the mechanism by the European Union with a transitional period; to be completed by 31 December 2025 Start of the CBAM target period 17 May 2023 1 October 2023 31 January 2024 1 January 2026 31 May 2027 Entry into force of EU Regulation 2023/956 establishing a carbon border adjustment mechanism (CBAM) Expiry of the deadline for the filing of the first report covering embedded emissions for the fourth quarter of 2023 Obligation for each authorised CBAM declarant to submit, through the CBAM registry, a CBAM declaration for the previous calendar year

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The EU CBAM: 2.4 Gradual Phase-In

Price of certificates based on the average price of ETS allowances in the week prior to import Based on the purchase of certificates Gradual phase-in as free allowances phase-out Transition phase: 2023-2026 collection of information not money Application phase: from 2027 - verification of emissions, purchase of certificates for annual submission

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The EU CBAM: 2.5 What Does it Mean for the Importers in the EU?

2023-2025 (2026): import products and collect CBAM data on them submit a CBAM report on a quaterly basis 2026 (2027)- onwards: verify the embedded emissions purchase CBAM certificates submit the CBAM declaration and surrender the certificates on an annual basis

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The EU CBAM: 2.6 Correction Mechanisms

CBAM 'discount' meant to correct the CBAM charge to reflect the existence of any carbon costs already paid in the country of origin of imported products Exempted are imports from countries with ETS linked to the EU ETS (e.g. Switzerland) - "linked" means having common market of emissions allowances (same carbon price). Not exempted are all others, including:

• Imports from countries having ETS of another type or less stringent (e.g. South Korea).
• Imports from countries having other measures of emissions reductions instead (e.g. US).
• Imports from LDCs.

The EU foresees the possibility of «crediting>> for existing explicit carbon prices in countries of imports. But how to determine the carbon price in case of command-and- control measures (e.g. standards)? Until free allowances are granted, the number of CBAM certification shall also be reduced accordingly.

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The EU CBAM: 2.7 Latest Proposal

EU CBAM Updates - 26 February 2025 (Omnibus Package)

De minimis threshold introduced A 50-tonne per year de minimis threshold exempts small importers of CBAM-covered goods from compliance requirements. Simplified CBAM compliance for importers Importers now have a flexible reporting option:

• Report actual embedded emissions, or . Use default values with a mark-up.

Extended deadline for CBAM declarations The deadline to submit CBAM declarations and surrender certificates is extended to 31 August each year.

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Regional Focus: USA Carbon Pricing Policies

Several legislative efforts aim to introduce Carbon Border Adjustment Mechanisms (CBAMs) in the U.S. All proposals are still pending in the U.S. Congress - no CBAM has been enacted yet. The main bills introduced in 2023 include: Carbon Competitiveness Act (CCA) 2023 Energy Innovation and Carbon Dividend Act (EICDA) 2023 Market Choice Act 2023

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USA Carbon Pricing Policies: 3.1 Recent Developments

Carbon Competitiveness Act (CCA) 2023

Carbon Intensity Charge

• Applies to domestic and imported energy-intensive goods exceeding emission benchmarks

Carbon Border Adjustment Mechanism (CBAM-style)

• Imposed on imported Energy-Intensive, Trade-Exposed (EITE) products, including:

• Fossil fuels, petrochemicals, fertilizers
• Hydrogen, cement, iron, steel, aluminum
• Glass, pulp & paper

Wider Product Scope than EU CBAM

• Includes products not currently covered by the EU CBAM
• By 2027, expands to include imported finished goods

Exemptions & Credits

• Fee waived for imports from countries with similar GHG pricing policies
• Special exemption possible for Least Developed Countries (LDCs) under specific conditions

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