GT8 – Domestic and International Aspects of the EU CBAM: Two sides of the same coin

Since the European Commission issued a proposal for an EU Carbon Border Adjustment Mechanism (CBAM) in July 2021, debates in the European Parliament and the Council have been underway and are expected to be long and lively, positions having already clearly emerged. This paper analyzes current positions throughout the EU Institutions in light of the principles and key issues Europe Jacques Delors (EJD) outlined in two successive policy papers in June 2020 and July 2021 respectively.

Overall, the Commission’s proposal follows largely the key parameters we proposed, but it is striking that the most debated issues in the European Parliament coincide with some of the key points we had identified.

In parallel with domestic debates, the initiative generated strong reactions internationally. This was anticipated given that the EU is set to become the first bloc in the world to establish a border adjustment measure. However, within the EU, the international dimension of CBAM - the close relationship between the domestic design and implementation of CBAM and the necessity to carry out a conversation with trading partners and specialized interna- tional organizations - is too often underestimated.

This paper also reviews the reactions to the CBAM pro- posal and the debate on carbon border adjustment at the international level. As trade frictions are likely to emerge as a result of different decarbonation trajectories and/or instruments, we believe that the EU should engage its trad- ing partners both bilaterally and multilaterally to avoid – these tensions.

Overall, the domestic and international aspects of the CBAM are two sides of the same coin. Now that the EU is set to adopt its own system, it needs to take a serious look beyond its borders and intensify its efforts to proac- tively – as well as visibly - engage with third countries. The urgency is to prevent the multiplication of trade distortive measures that would create tensions and be detrimental to the objectives of the Paris Agreement.

To succeed, the EU will have to lead by example in design- ing its own CBAM while also ramping up its diplomatic efforts and extending a genuine proposal for cooperation to all its partners, developed or not, like-minded or skeptical, by:

• Internally, adopting a CBAM that is in line with the one proposed by the Commission, but improving it with: i) a shorter phase-out of ETS free allowances, ii) a clear review clause for extending the scope of CBAM, and iii) the set- up of a dedicated EU agency for its implementation. In doing so, no export rebates should be introduced.

• Externally, demonstrating leadership toward, on the one hand, least developed countries by directing the use of CBAM revenues to assist their transition to carbon neutrality, as well as considering their exemption from CBAM, and on the other hand, like-minded countries by combining two complementary and mutually reinforcing approaches: a comparability forum, and a carbon club. These cooperation offers will need to be open and inclu- sive to ensure the participation of specialized interna- tional institutions, as well as to welcome any country that shares the objectives of the Paris Agreement.