Q&A: Swedish perspectives on EU proposal for Carbon Border Adjustment Mechanism

CBAM is a proposed policy measure to tackle carbon leakage from the power sector and energy-intensive trade-exposed industries. Carbon leakage generally refers to the challenge of production and investment shifting from a country with more stringent climate policies to one with less stringent climate policies. CBAM addresses this by putting a price on imports into the EU. The Commission first raised the option in its European Green Deal and it tabled a proposal in July last year as part of its “Fit-for-55” package of climate policies to move the EU towards its 55% greenhouse gas emissions reduction target by 2030. Currently, carbon leakage is dealt with by giving emissions allowances for free to industries under the EU’s Emissions Trading System (ETS). However, as these free allowances reduce the carbon price signal, the Commission suggests phasing in CBAM and phasing the free allowances out over a 10-year period from 2026–2035.

The CBAM proposal is fraught with political challenges. Within the EU, member states are concerned about the impact the mechanism may have on the competitiveness of their industries. Moreover, there are questions about the extent to which the administration of the measure should be centralized and how CBAM revenues should be spent. As a trade measure, CBAM is also sensitive internationally. While the measure has been designed to be compliant with World Trade Organization (WTO) rules and aims to bolster EU climate policy, third countries may perceive the measure as protectionist and at odds with the Paris Agreement’s emphasis on nationally determined climate ambitions.

Swedish industry has expressed concerns about the Commission’s plans on three issues in particular: the exclusion of exports, the timeline of the free allowance phase-out and the exclusion of indirect emissions such as emissions from electricity inputs. Excluding exports from CBAM can harm the competitiveness of export-oriented Swedish industries because low-carbon European goods and products will become more expensive compared to more carbon-intensive goods produced in third countries without carbon pricing in place. Regarding the timeline of the phase-out of free allowances, certain industry stakeholders have called for an evaluation of CBAM before phasing out free allowances. They believe it gives industries time to make investments and transform, and would allow for an intervention if CBAM has a negative impact on competitiveness. Lastly, Swedish industries have expressed almost unanimous concern regarding the exclusion of indirect emissions from the scope of CBAM. Without any compensation for the carbon costs of electricity passed through by power producers, electricity-intensive Swedish industries argue that they will bear the additional costs and their competitiveness in both national and international markets will be impacted.

No. Discussions at the workshop showed that some actors pursuing carbon-free industry processes and technologies see CBAM as an opportunity. If they can produce the same product as their competitors, but without emissions, they will benefit once their competitors have to pay the full price of carbon. They argue for a very fast phase-out of free allowances.

The proposed CBAM only applies to imports and the Commission does not envisage rebating any carbon price paid for exported products. This means that export-oriented industries can lose market share to competitors. When those competitors produce more carbon-intensive goods, this leads to carbon leakage. As the workshop made clear, this is a key concern shared by various Swedish industry stakeholders, who argue that Swedish exports are generally cleaner than those of their foreign competitors. At the same time, including exports raises several challenges. A rebate effectively limits the scope of carbon pricing in the EU and may even provide a perverse incentive for European industry to export carbon-intensive products. For these reasons, Swedish environmental NGOs are sceptical of export rebates. Moreover, export rebates contravene WTO rules on subsidies and may lead to trade retaliation. While the EU and its member states can provide financial support for decarbonization to EU-based companies, linking such support to exports could well lead to a trade challenge.

For Swedish environmental NGOs, the core message is that CBAM is an environmental measure. This, they argue, means that free allocation should be phased out immediately and export rebates should be avoided. Moreover, the NGOs argue that the funds generated by selling allowances as well as CBAM revenues should be used for further decarbonization.

What is striking is that compared to Swedish industry, only a few other non-industry Swedish stakeholders have engaged in depth with the CBAM proposal. One possible explanation may be the very technical nature of the measure. With the Commission proposals for CBAM and EU ETS reform and their associated documents running close to 900 pages, constructive engagement with the proposal requires significant investment in time and resources, as well as a great deal of expertise in both EU climate policy and industrial policy. Although certain NGOs may have this expertise, it is harder for other non-industry stakeholders, let alone the public at large, to engage with the details.

CBAM has drawn a variety of responses from countries exporting to the EU. Countries such as Canada and the UK have begun exploring a CBAM of their own. Others have strengthened climate action in response, with Turkey citing the measure as a reason for joining the Paris Agreement. Others such as Australia have criticized the WTO compatibility of the proposed measure.

In its proposal, the Commission exempts several countries such as Norway and Switzerland because they participate in or are linked to the EU ETS. Moreover, producers from other countries that have national or subnational carbon pricing systems in place can claim a reduction in the CBAM cost. Other climate policies that do not involve an explicit carbon price, such as clean technology standards, are not credited under the Commission’s proposal. This means that many producers from the US – where, notwithstanding some regional emissions trading systems, a federal carbon pricing system is unlikely to emerge anytime soon – would be exposed to CBAM. While some Swedish stakeholders suggested that including the effects of these non-pricing policies would make sense, others pointed out that doing so would further complicate an already complex measure and may also raise concerns in terms of WTO law.

The French Presidency of the European Council is eager to come to an agreement among member states on CBAM by mid-2022. If France is successful, negotiations between the European Council, European Parliament and Commission on the CBAM legislation look set to begin in the autumn of this year. While discussions between member states continue in the Council, the European Parliament is going through a parallel process. It will debate and vote on the CBAM proposal this spring. If the proposal is not delayed, the CBAM’s transitional period, under which importers are only required to report on their embedded direct and indirect emissions, is due to begin in January 2023, which coincidentally is also the beginning of Sweden’s six-month European Council Presidency.