What design of the carbon border adjustment mechanism (CBAM) ensures an inclusive transition to climate neutrality? A position paper from the Climate Friendly Materials Platform.

In July 2021, the EU Commission published its proposal (read additional analysis) for a carbon border adjustment mechanism. European researchers from the Climate Friendly Materials Platform are concerned that under the proposed CBAM design, the Fit For 55 package will not create an investment framework to contribute to the green transition. In their position paper, they suggest a set of refinements using well-established elements which will allow the Green Deal to provide the basis for an inclusive transition to climate neutrality.

Key Messages from the Position Paper
  • The researchers propose adjustments to the CBAM file to secure incentives for investments towards climate neutrality while avoiding carbon leakage risks and uncertainty on WTO compatibility.

  • Their proposal combines three well-established policy elements:
    1. A climate contribution levied on basic material production and imports to create effective carbon pricing incentives along the value chain which can built on established border adjustment mechanisms from excise charges.
    2. Free allowance allocation for firms with transition plans to climate neutrality and
    3. Carbon contracts for difference issued at EU scale to cover incremental costs of investments aligned with climate neutrality.

  • These elements have been controversial because they include continued free allowance allocation to basic material production during the transition period. On its own, this would undermine the environmental and industrial policy objectives. However, in combination with a climate contribution and with carbon contracts for difference, both environmental and industrial policy objectives can be achieved.

  • The researchers therefore argue decision-makers should not consider individual elements, but the entire package. This can close the Green Deal between society, industry and the environment. It would thus be the basis for an inclusive transition to climate neutrality that will not leave any industrial region behind.

  • The leaked draft of the CBAM file can accommodate these needs. It already envisages a transition period which could be expanded until an international cooperative agreement secures a common carbon price among major trading partners. During this transition period, the leaked draft already emphasizes the use of default values and can thus be further refined to incorporate the three elements.