Carbon border adjustment will not provide an equal playing field for EU business, according to a new research

Researchers from the University of Cologne’s Institute of Energy Economics (EWI) write in a policy briefing that while a European CO2 border adjustment payment can be a first step toward a fairer competition environment in terms of emission costs, not accounting for indirect emissions means that a level playing field has not yet been established. According to the European Commission’s current Carbon Border Adjustment Mechanism (CBAM) proposal, importers of aluminum, fertilizer, steel, iron, cement, and electricity would be required to pay at the EU border to compensate for the CO2 costs associated with the production of similar products in Europe, but not for indirect emissions, such as those associated with the generation of electricity, heat, or gas used during the manufacturing process.

However, European manufacturers incur these expenses, for example through the EU Emissions Trading System (EU ETS), and will likely no longer get freely allotted CO2 permits via the “carbon leakage list” in the future, according to the EWI. “Not taking indirect emissions into account in the EU-CBAM causes competition distortions and may erode EU producers’ international competitiveness,” said senior research consultant Eren am, who co-wrote the policy brief with Lisa Just and Patricia Wild. The CBAM is likely to have the greatest impact on manufacturers in Russia, Turkey, and Ukraine, particularly in the steel and iron sectors, according to the EWI experts, because they have significant import volumes and no or low CO2 prices.

The European Union is moving closer to implementing a carbon border adjustment mechanism, a tool that has been lauded as a boost to climate action but has also been labeled as a means of igniting fresh trade conflicts between the union and its trading partners.

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Many companies and non-EU countries are concerned about the system that requires importers to pay if their product has a greater carbon footprint than their European equivalents, as the EU pursues a higher climate-neutrality objective and a green makeover of its whole economy.