COP28 notes: EU side event - role of Carbon Border Adjustment Mechanisms in promoting carbon pricing initiatives worldwide

Featuring:

Moderator: Tim McPhie, EC

• Mohammed Chahim - EU Parliament
• Senator Sheldon Whitehouse - US Senate
• Gerasimos Thomas - EC DG for taxation and customs union
• Marcelina Mataveia, Mozambique Ministry of Mineral Resources and Energy
• Anna Luehrmann - German Ministry of Foreign Affairs
• Luisa Neubauer, Fridays for Future Germany

Moderator: carbon pricing is one of the hot topics at COP28, maybe hotter than we expected, but we’re here to discuss in the positive spirit in which CBAM was devised.

It’s about avoiding carbon leakage, promoting action.

Gerasimos Thomas, EC:

• in past panel we debated the role for carbon pricing and expansion around the world. The more we raise ambition m, the more pricing becomes complementary to other measures. But we face need for mirror instruments like CBAM. Deals in a modern way with the risk of leakage. Need instruments that incentivize private sector to adjust, where innovation needs to take place. CBAM links performance to carbon price. It works because it advantages companies that get greener faster. Pays revenue that can help vulnerable industries. Fair, treats all products/suppliers the same way. And companies learn to calculate their emissions and this flows through to their suppliers and customers.
• It’s a targeted instrument that achieves important objectives. It complements our finance of green transition around the world.
• We have much experience around the panel, good to debate this.

Anna Luehrmann, German MOFA

• we’ve just started reporting phase of CBAM, now the time to exchange experiences and think where we want to go.
• We’ve committed to 1.5 and net zero in our industrial sectors, we need the appropriate policy tools to be implemented. They need to achieve emissions reductions.
• In an ideal world we’d negotiate an agreement at COP with similar carbon pricing worldwide, and wouldn’t need CBAM to prevent carbon leakage.
• But we started with second best, the EU ETS; and that imported goods will reflect similar carbon price to Europe’s
• The G7 Carbon Club wow about how we decarbonise sectors like steel at similar rates around the world. Still open for new members! Can complement the CBAM, which will help us inspire particular industries to cut emissions.

Sen Whitehouse

• thanks to M Chahim for his work in the EU Parliament and for coming to speak to Americans including Republicans who are developing a similar carbon adjustment measure to my own.
• I’ve been to 6 COPs. Without a significant price signal our efforts will fail. I believe that CBAM can make a bigger difference in reduced emissions than everything agreed at this COP.
• Plus knock on effect: if Europe sticks to its guns, other countries will need to make their own adjustments.
• If you want a forcing event to move US politics there is no better path than EU CBAM.
• My plan is to make progress on climate by aligning incentives and pricing carbon. I’ve advocated internal pricing, Biden has taken on social cost of carbon reform, but CBAM is big. I’m a fan.

M Chahim

• I also met the Senator in DC, not just Arizona! He motivated my team to move forward on this legislation.
• The EU needs a story. CBAM story is twofold: reduce emissions! After COP we hopefully have a phaseout of fossils. 1.5 is not in reach; we need to do much more. How do people react against EU taking responsibility for its consumption of emissions?
• China is welcome to sell into Europe, but if you pollute you pay at the border. Our emitters have had free allowances, which weaken the price signal. So we’re taking those away as CBAM comes in.
• I don’t care about CBAM revenues, if it’s up to me it should go fully to climate finance.
• If by 2030 there’s no serious decarbonisation we’ll have passed tipping points.
• So other economies: price carbon yourself, keep the money - we don’t want it. We want emissions reduction with green growth. Treating your producers as a child that is spoilt and needs help and can’t perform, they will never perform or be competitive - today or in 10 years when others have decarboniaed. Work with us, we’ll work with you.

Marcelina Mataveia, Mozambique Ministry of Resources and Energy

• Mozambique has aluminium smelting and exports to EU. We know this mechanism will affect our country. But we don’t think it’ll be negative if we prepare.
• Mozambique has huge renewable potential and are launching our strategy at this COP. Need to scale up RE so we can play an important role in global decarbonisation.
• Prep needed in technology, resources, capacity building for our companies to use clean energy. Our companies could be negatively impacted if we’re not ready.
• EU can advise us on how to prepare. We can intrude local taxation mechanisms so we can benefit from the process. If our country introduces more renewables our aluminium will be more competitive.
• We’re very aware of the issues and we’re working to benefit from CBAM

Luisa Neubauer- YOUNGO

• School strike for climate has been part of the movement showing you can be strong on climate and win elections. We’ve seen flips from parties that were not keen on climate before
• Youth climate justice movement wouldn’t go out and claim that green growth is good, but we asked policy experts what we should focus on and they said “CO2 tax”. We were more interested in anarchist solutions but we couldn’t ignore the science, so we lobbied for it and we won.
• So Germany has a CO2 tax, one of the largest economies in the world
• But this policy looks fragile to political processes. Tax in Germany was ridiculously low, we sued and won, but the rise in the tax has been stopped. That’s not how the climate crisis works! It doesn’t care if our economy is fragile.
• CBAM needs to prove that pricing can be resilient to political changes.
• We need reliability and speed but also justice. What will this mechanism show to the world? We’re trying to show the global south that they’re respected. Will CBAM do that? I don’t know, but good luck.

Sen W: a lawsuit in Montana by youth won and has forced stronger climate protection there.

Q: what is Germany hearing in the climate club about CBAM?

Minister: I get a lot of questions about CBAM! Because it is new. There are fears from others. But the idea is to inspire others to price pollution. There’s no point in us increasing the price for steel production in EU then importing fossil/heavy steel from elsewhere.

In CBAM regulation, it says that if products are imported from countries with a similar price to EU, CBAM doesn’t apply to you.

We have a transition to 2026 with reporting, then adjustment. Many conversations about how to reach ambitious schemes everywhere. That seems ambitious to some, but not to others like youth!

Q: Gerasimos , what’s the reaction to the work?

GT: persistence will win! Don’t have doubts, Senator - CBAM was agreed in record time for EU, but we knew we needed a transition period. This time to 2026 is for preparation.

Pricing pollution aims to treat everybody the same. Looking at the emissions in the product, not just the country. We apply a hard standard to our industry and take away 1/6 of allowances to energy intense industry next year! And we will drive that to zero.

It’s not just big companies but SNEs that will have to adapt to zero free allowances.

Markets and customers want green products. Every effort in countries like Mozambique will be recognized. Currently they make aluminium with coal power from South Africa. Important that we help it transition, but that it stop using the coal.

Other African countries are in dialogue; I spoke with activists who see African CBAMs as an opportunity.

Europe is a net importer of these products, and in future we’ll import more. It’s not about expanding our production, but making sure our efforts lead to emissions reductions.

In transition period, small companies that contribute less than 20% of final emissions don’t have to report. We ask big companies to give small certificates of carbon intensity with that they can feed in to their customers.

We want companies around the world to participate, give information, help find the best way to handle Scope 2. It won’t solve all problems but it’ll move us forward.

Q: is CBAM more opportunity than threat?

MM: we need green industrialization. If we can sell clean aluminium we’ll be more competitive. And if we can achieve growth in services through clean energy we’ll be better placed than those who are high emissions.

We also have natural gas. I was in a panel discussing CCS in LNG; that is very important for us, and we have an opportunity to develop all the technologies and partner with other countries and get finance to develop clean energy and clean industry.

Q: we don’t always hear CBAM is an opportunity, Mohammad how do you deal with negative rwactions?

MC: we heard requests for exemption, but that would have been the end of the CBAM.

US IRA provides some recognition for partner countries, but no country will agree to exemptions that would end their industry in five years. We need to help countries like Mozambique based on equality and partnerships. We need more initiatives like Just Energy Transition. EU has huge demand for clean energy, more than we can produce alone. Need partnerships that are win win.

I would love that CBAM becomes redundant - it’d mean either fully clean production or your own carbon pricing mechanisms. Our ETS revision means by 2038 there are no CO2 allowances anymore (could be changed but we hope not). So by then the heavy industry has to be climate neutral! 2038! This has support from industry.

Q: how is the US going on carbon pricing?

Senator: I’d love CBAM to be unnecessary but the opposite is true - it’ll take the CBAM to push the US to act. No waivers, no excuses. That pressure will hold our feet to the fire, overcome domestic fossil influence, and open the door for a new political equation in the US that’ll be favourable to a safer climate future.

Re climate justice: if we fundamentally disrupt our planet, the burden will fall heavily on the poorest. CBAM is a climate justice win, and opens the potential for investment in these countries with clean economy opportunity.

If it turns out there are countries who are particularly burdened, there is always room for exemptions down the road.

Q: for Whitehouse - what does a CBAM look like without a carbon price?

Senator: we have Avery capitalism economy in the US and it works well in many ways, but not in climate. If there’s no discipline to calculations you get greenwashing. If the EU is looking at imports they’ll be rigorous and advertising about cars with 1% clean steel won’t wash.

This area is dominated by public relations

Q: carbon price is not necessarily socially just, it makes things more expensive since for the poor especially. “The carbon pricing incidence calculator “ launched at COP by Mercatus. How to make carbon pricing socially just?

Senator: compared to what? Ruinous collapse of nature will be nil on social justice!

We return tax benefits to the lowest income in our bill.

AL: the spikes in food prices we see worldwide can be linked to the climate crisis. If that goes on, the most vulnerable enable will suffer the most. We use the income from carbon pricing and return it to the most vulnerable - there are several models for this. In Germany we’re replacing fossil heating with modern heat pumps - need huge schemes to ensure people with low income get support to switch. We need to talk about it better than when we introduced the bill six months ago.

Luisa: I challenge that interpretation of justice. We find especially in Germany, US, it’s not enough to say “it’ll be worse in. Ten years if

You don’t price carbon”. People don’t look to the future self but now. So mechanism has to prove itself now to be legitimised.

I think there’s a risk of doing the calculation without climate justice or mitigation. Any mechanism is an invite to the dirtiest producers to fiddle the numbers and trick the systems. We see this in the EU ETS with excess free allowances. Need to close loopholes.

We’re also in ecological breakdown that affects many resources - how do we deal with that? What about water, minerals, exploitation?

Chahim: I agree you need to look at other impacts. Inspiration is better to motivate people than catastrophe. But we do live in a climate crisis. We’re not doing enough, the NDCs do not add up. CBAM produces funds that we can use for more mitigation. I’m a fan of tripling sustainable energy as a commitment here at the COP.

Q: I’m from Sri Lanka. CBAM has no cap, does that disincentivize domestic purchases? And form 2038 how does the CBAM process get formed?

Chahim: this is very technical! By 2038 I hope this will be easier to address.

Q: how do we empower institutions etc to look at this as a whole and advocate climate mitigation?

Q: 27% of companies feel ready to comply. How definitive are the timelines? Will they slide?

Gerasimos - a lot of details are in secondary legislation. In early 2025 we’ll decide who will be verifiers. We don’t have financial consequences now, but there will be annual reporting. Companies need to get ready for the timelines as they are! This will be mainstreamed. The major financial institutions are working to ready companies for measurement.

Q: there a lot of criticism of the EU in the negotiations. Can Mozambique be a bridge builder?

MM: we don’t see opportunity and our country can play a role of incentivizing other countries. We’re open to learn and take steps. We have a different partnership with institutions that support our energy strategies. We believe we can access finance and activities that are important in this process.

Q: Ukraine is establishing its own carbon tax system to ease abatement and connection with EU, our main trade partner. How do we establish investment attraction and joint investment?

Q: comment and question

Comment - Australia is considering a CBAM and should reach a decision by the end of next year

Question - there’s a lot of sparring here at COP on Unilatwral Trade Measurs but not dialogue. What does a good venue for CBAM conversation among states look like?

• G - congratulate Ukraine, very courageous on reform. Shows pricing creates revenues and can address justice. EU has a justice fund, every nation has the needy to take care of. We have 79 pricing systems in 53 countries! They’re not all like EU ETS but a base for a global system and some harmonization. We’re working actively with others who are looking at leakage - Australia, Canada, others but also countries in the global South. We’re passing our experience bilaterally. OECD are working on methodologies for embedded emissions and we encourage countries to engage. The 53 countries in the initiative will form the basis for the methods of the climate club. CC secretariat agreed to draw methods form one source, one work stream.
• In next five years you’ll have a body of international work that helps countries navigate this area.

Chahim: I was in Brazil and I heard many companies are asking their government to set up pricing to give them an advantage over sectoral competitors who are not moving. We are on our way!