Carbon Border Adjustment Mechanism: expectations and implications for the CEE region
Author: Tibor Schaffhauser

The European Commission has long been preparing and feeding information to the public on its new climate instrument to even the international trade playing field for European companies, the so-called Carbon Border Adjustment Mechanism (CBAM). After the proposal has been leaked to the press lately, the Green Policy Center had a look at the text to see what it could mean to the CEE region.

In order to reach the raised climate ambition of the European Union, namely cutting the bloc’s greenhouse gas emission by at least 55 per cent by 2030, the European Commission has been working on its new Fit for 55 Package with 12 different pieces of legislation for some time now. One of these measures is the Carbon Border Adjustment Mechanism (CBAM), which has caused a lot of interest and upheaval among the international trading partners of the EU due to its suspected market protection effects. Since the Commission proposal has been leaked recently, we can have a better understanding of what it could mean for the CEE region.

One could argue that the CBAM is exactly the measure the region has long been asking for. The CEE EU Member States have been bantering all previous proposals to raise EU climate ambitions that they would harm the competitiveness of EU companies against third countries with less stringent climate regulations. The very aim of the CBAM is to provide an even playing field for EU companies and their third-country competitors by imposing a carbon price on the EU border for certain imported products equalling the all-time EU price on pollution. It would mirror the EU Emission Trading System (EU ETS), so importers of the selected carbon-intensive goods would pay a similar carbon price as if they were covered by the EU ETS.

This new measure would then make the selected imported carbon-intensive products just as expensive as domestic ones, making the local businesses competitive and keeping them from relocating their production outside of the EU climate policies. On the other hand, this could also incentivise the third-party producers and governments to make their production less carbon-intensive in order to access and compete in the world’s largest common market. The CBAM would also raise significant revenues, between 5-14 billion euro according to the estimates of the Commission. The raised money would then finance climate protection measures.

In theory, this is a sound concept and can become an important and effective tool in the arsenal of the future EU international climate policy. Then how come almost all of the international trading partners of the EU are loudly protesting against the CBAM proposal of the Commission? Other major economies are seeing the CBAM as a protectionist measure to support EU companies and a custom duty to raise additional revenues, which could be against the rules of the World Trade Organisation. The Commission is arguing against this assumption, recalling the CBAM’s original intentions of environment protection.

However, currently, several sectors receive free allocation of emission units under the EU ETS, making the CBAM incompatible with WTO rules. The recently leaked Commission proposal on the reform of the EU ETS is trying to address this issue since the paper tells that sectors covered by the CBAM should not receive a free allocation, however, it does not define when this free allocation should be phased out. Phasing out these free allowances has already long been debated in the EU, so we can expect some heated discussions even more since the companies of CEE Member States are also receiving these. Regarding the custom duty aspects, a recent paper has highlighted that it could hit developing countries’ economies hard. A solution here could be to allocate the revenues of the CBAM to support just transition in these countries.

According to the leaked paper, the first targeted sectors of the CBAM would be the steel, iron, cement, fertilisers, aluminium and electricity generation industries. It would also not only focus on the direct emissions caused by the production of goods, but also on the indirect emissions such as the electricity consumed by the production itself. The draft also discusses how should the emission calculating methods be used and sets up a new authority where foreign producers have to report to. The importers would also be required to buy emission certificates, somewhat similar to the EU ETS system. According to the document, the CBAM would be introduced in 2023 and would be up and running by 2026.

Because of the sectors targeted by the CBAM, the most affected would be the immediate neighbours of the EU, mostly who already have undertaken some integration steps, like being a Contracting Party of the Energy Community (an international organisation dedicated to integrating the EU neighbours to the common EU energy system) or having signed association agreements. Since Member States in the region, like Greece, Croatia, Romania and Hungary are importing more and more dirty energy from the neighbourhood, including the electricity sector in the CBAM proposal makes sense. However, it is important to note that in order to effectively stop carbon leakage in the sector, extending the EU ETS to the imminent neighbourhood would be more reasonable, since it would cut emissions in these countries more effectively, according to a recent study. Several neighbouring countries, such as Ukraine or Montenegro have already embarked on this journey, therefore supporting them in this initiative would also be in the interest of the CEE region.

To solve the above-mentioned challenges, the Commission still has a bumpy road ahead. However, during a recent event, Frans Timmermans, Executive Vice-President of the European Commission responsible for the European Green Deal has stated that the EU will discuss with partners what kind of measure (like regulation or taxation) they can use to lower their emissions in order to escape falling under CBAM, as long as they share the same goal as the EU, namely climate neutrality by 2050.

Related Articles


The sense of urgency has not yet entered the room – taking stock of the first week of COP27

The sense of urgency has not yet entered the room – taking stock of the first week of COP27

Just before midnight on Saturday evening, the technical negotiations of the UN COP27 climate conference currently taking place in Egypt have ended, giving the opportunity to the ministers arriving in the second week to reach political agreements. Although we have seen some progress and the positions of developed and developing countries have converged, there is still a lot of work ahead of the negotiators in the second week of the conference in order to be able to talk about real results in Egypt. A quick analysis by a colleague of the Green Policy Center on site.

UN climate conference – Balancing between finance and ambition

UN climate conference – Balancing between finance and ambition

This week, the 27th annual climate conference of the United Nations the COP27 begins under the presidency of Egypt. The “African COP”, as the developing countries refer to the conference, faces serious challenges: it must simultaneously increase the ambition to reduce emissions in order to maintain the climate goals and preserve a ray of hope for small island states of survival, as well as meet the developing countries’ huge financial expectations. Will the Egyptian presidency manage to reach agreements acceptable to all parties and what role will the European Union play in all of this?
Although we are currently mostly occupied with the energy price crisis, we must not forget the challenges caused by climate change. That is why it is worth paying attention to Sharm el-Sheikh in Egypt, where delegates from nearly 200 UN countries are expected to discuss the most burning issues of international climate policy in the next two weeks. And there are plenty of burning issues; this year we have all felt the negative effects of climate change on our own skins, just think of the summer droughts and forest fires, or the floods in Pakistan that claimed 1,500 lives and caused 30 billion dollars in damages.
One of the most controversial topics in the coming weeks will be related to these events; the so-called Loss and Damage negotiations. According to the IPCC, the climate change scientific advisory body of the UN, climate change threatens the lives and livelihoods of 3.3-3.6 billion people in the future. Climate change strongly affects the poorest strata of the population, as they are much less able to adapt to its negative effects; developing countries are therefore demanding a new financial fund to compensate for the damage caused by climate change. Since developing countries generally emit less greenhouse gases and they are still affected by climate change, they are calling upon developed countries to finance this new fund due to climate justice and the “historical responsibility” of developed countries. However, opinions differ as to what amount would be sufficient; calculations are about expected damage between 1-1.8 trillion and 5.6 trillion dollars by 2050.
The United States, as well as the European Union and its member states, have so far opposed the establishment of a separate financial fund, fearing that, if it is created, there will be no limit to the financial claims of developing countries. During the negotiations, the EU has also underlined that there are already an existing fora for the topic under the UN umbrella, and that developed countries have undertook to mobilize 100 billion dollars yearly to support the climate protection efforts of developing countries. Since we have not yet succeeded in achieving this goal, the developing countries are distrustful of the developed countries for the time being.
In order to rebuild trust, several European member states have already offered resources to deal with Loss and Damage, and developed countries have pledged to double the resources offered for adaptation action. Furthermore, developed countries are also developing a delivery plan on reaching the 100 billion dollar per year goal, and started negotiations to define the new long-term climate financing goal as well. However, according to the position of the EU and its member states, public resources alone will not be sufficient to curb climate change, so we recommend starting negotiations on how to bring global financial processes in line with the 2050 climate neutrality goals. It is still an open question whether this topic will be on the agenda or whether developing countries will only see it as a distraction from the immediate mobilization of finance.
The chance of survival of small island states is an open question at the moment as well. If we cannot keep the rise of the global average temperature below 1.5°C, several of these countries may drown in the sea, so it is really a matter of life and death for them to reduce emissions as ambitiously as possible. Last week, the UN environment and climate change organizations both published their assessments on how we are doing in the fight against climate change. While we could be optimistic after last year’s climate conference because of the new commitments announced there. according to these latest analyses, we are no longer doing so well in terms of implementation. Among the major emitters, only the EU and the USA have reduced their emissions, while the global GHG emissions have reached new all-time record high levels. Another cause for concern is the fact that even if the current commitments are fully fulfilled, we can still expect a warming of around 2.8°C by the end of our century – not aligned with the 1,5°C pathway recommended by science and necessary for the survival of small island states.
For the EU and its member states, the progress under the mitigation work program up to 2030 during COP27 is therefore of outstanding importance, so that the countries of the world can formulate more ambitious climate policy steps as soon as possible. This is not only important for the survival of small island states, but if we can keep climate change under control, its negative effects will cause less loss and damage, and the we need to mobilize less resources to compensate for those. As we can see, everything is connected with everything, which is why the Egyptian COP presidency will be in a difficult situation in the next two weeks. We can hope for all of our sake that they manage to deliver on the expectations of all sides, both on ambition and finance.