Climate Policy

CO2 Border Adjustment: How is the EU Going to Save the Climate?

The European Union has set its sights high. The new ambitious emissions target is to reduce CO2 emissions by 50% by 2030 (base year: 1990). The proposals that the EU Commission will present to this end make use of a broad range of instruments and will have a profound impact on the everyday lives of Europe's citizens: they address emissions trade, energy taxes, energy efficiency targets, CO2 border charge, a climate action social fund, and green fuels. Individual mobility, housing, energy production, shipping and air transport, food production and forestry, exports and imports, and the expansion of renewable energies as well as their infrastructure are also affected.

In the Europe of 2030, people will live, drive, fly, eat and do business differently than they do today: Europe will have to transform itself if the agreed goals are to be achieved. European democracy has placed the political negotiation process before the realization of the plans. The presentation of the Commission's plans will be followed by opinions and negotiations between governments of member states and the European Parliament, as the EU's legislative process requires. In this process, the different interests of individual member states are going to clash fiercely; lobby organizations of the affected industries and NGOs will try to make their voices heard. The big question here is: Can the 2030 benchmark be maintained?

Expanding Emissions rade

Three examples alone may illustrate the dimension and complexity of this future process. Point 1: The restructuring of the EU emissions trade system. Trading emissions in order to reduce CO2 emissions is an intrinsically liberal approach. It is considered well established by now and is being taken to its next stage. Next to energy production, manufacturing and aviation within the EU, its scope is to be extended and the number of certificates reduced, as well as their free distribution. According to the new proposals, the EU Commission wants to include shipping, buildings and road transport into the system.

What is certain is that the "simple" savings have long since been realized by energy producers and industry in recent years; all the next steps will be significantly more expensive and citizens will feel them more directly. In their wallets, when prices rise, and also in everyday reality, when buildings are being prepped, for example. We can also expect that member states such as Poland, whose energy production is still heavily dependent on coal, will put up stubborn resistance against the plans and demand compensation elsewhere.

This is where the Climate Action Social Facility becomes important. This is EU speak for a social fund for climate protection measures, into which at least 50% of the revenues generated by the revamped emissions trading system are supposed to flow. This budget will then provide funds to cushion the costs of the transition for vulnerable citizens. Which makes up for plenty of material for long nights of negotiations, which we know are typical of Europe.

Making International Trade more Climate-Friendly

Point 2: The introduction of a CO2 border charge, or Carbon Border Adjustment Mechanism (CBAM), in the language of economists. This charge on imported goods from third countries with lower climate requirements is to prevent production facilities from relocating to places with lower climate protection requirements, and to also protect European industries from an unfair competition caused by goods with a higher CO2 content. The initial focus will be on protection for cement, fertilizers, iron and steel, aluminium and the production of electricity. In addition to the usual definition issues there are unresolved problems as to whether this measure is compliant with WTO regulations. In fact, CBAM will only be compatible with WTO rules if the previous allocation of free emission certificates to individual sectors ceases. This is important because double compensation is prohibited.

There is another, very fundamental problem that the EU will have to deal with in the future: The U.S., China and a few emerging economies are worried about the EU as their export market. Such concerns can quickly turn into countermeasures that could further weaken the already severely battered international trade, perhaps even to the point of a full-blown trade conflict.

Both the reform of the emissions trading system and the planned introduction of CBAM show that the EU's plans are dependent on international cooperation. Ideally, a global certificate trading system would allow investments in climate protection to be made where the savings are greatest and corresponding innovations can be triggered efficiently. At the very least, the EU must employ skillful diplomacy and specifically targeted offsets to persuade as many countries as possible to join in so that excessive distortions in trade and globalization can be avoided - a Herculean task indeed.

Room for Compensation Deals

Point 3: The revision of the Energy Tax Directive (ETD). This piece of legislation is almost twenty years old, sets minimum tax rates for energy products and regulates tax exemptions or concessions, for example for diesel and kerosene. This is a major lever for government revenue and steering effects. However, taxes in the EU are decided upon by the member states by unanimous vote. Tough battles between different interest groups are inevitable. Compensation deals and compromise packages in a whole other range of areas are ahead.

This only brief look at some of the 13 parts of the "Fit for 55" package has already shown how complex and multifaceted the package itself is, and how many cross-connections exist between its components. And that does not begin to describe the full picture of the difficulties. The same heads of state and government, the same EU Parliament that has to manage this package will have to deal permanently with new crises and challenges, as well as deploy political and material capital and the resource of time to solve the crises and meet the challenges. The systemic conflict with China, the organization of migration, the preservation of the unity of the West and the security threat posed by Russia are just a few examples.

The Long 2020s of Climate Policy

The 2020s are going to be a decade of multiple challenges and tests for our politicians, our institutions and, not least, our citizens. As a matter of fact, with regard to EU climate policy, the 2020s could last much longer than just until 2030. But! If the EU is to start out right away, negotiate hard, seek alliances, fight disinformation and populism, and leave room for innovation and international trade as well as for the expansion of emissions trade, there is a real chance to reach the new climate goal without losing Europe’s citizens on the road to transformation.

Thomas Ilka is Regional Director of the European Dialogue, Friedrich Naumann Foundation for Freedom in Brussels.

Dr. Nele Fabian is European Affairs Manager at the European Dialogue, Friedrich Naumann Foundation for Freedom in Brussels.

The European Dialogue of the Friedrich Naumann Foundation for Freedom is holding its 2nd and 3rd Sustainability Weeks on the topics of mobility and food in September and October. The first Sustainability Week took place last week. It focused on the future of consumption and production as well as circular economy.