How to marry the EU’s climate ambition with its preference for open markets

Abstract

Through its commitment to climate neutrality by 2050, and a 55% reduction by 2030, the EU sets a high standard for the implementation of the Paris Agreement. The main policy instrument applicable to most companies in the energy and manufacturing sectors is by setting a price on carbon through its EU Emissions Trading System. To limit the risk of carbon leakage and to encourage other countries to up their ambition, the EU is preparing for a Carbon Border Adjustment Mechanism (CBAM) that would ensure a level playing field for industrial commodities. One can anticipate major political opposition to such a measure from trading partners such as Russia, China and the US. Furthermore, major ‘technical’ questions such as on comparability of climate policy measures will have to be addressed, while the European Council has endorsed the idea of making the CBAM a new EU ‘own resource’ to finance the ‘Next Generation EU’ borrowings. The European Commission will be making a legal proposal for a CBAM in June 2021 with a view to making it operational by 2023. The EU will have much to explain to its international partners in the World Trade Organization as part of its bilateral trade agreements, and in the context of the international climate process, in particular in the run-up to Climate COP26 in November 2021.