A balancing act between climate protection and economic efficiency – Image: Xpert.Digital
EU relaxes carbon border adjustment: What are the consequences for climate goals and the economy?
The EU's Carbon Border Adjustment Mechanism (CBAM): A mitigation with far-reaching consequences and complex background
The European Union, a pioneer in global climate protection, is facing a significant course correction regarding one of its most ambitious instruments for combating climate change: the Carbon Border Adjustment Mechanism (CBAM). According to a leaked draft law , the European Commission plans to significantly soften the originally very far-reaching requirements of the CBAM. The proposal suggests that up to 91 percent of companies currently subject to the CBAM would be exempt from reporting and payment obligations. This surprising turn of events raises numerous questions and presents both opportunities and risks for the European economy, global trade, and the EU's ambitious climate targets.
The intention behind the carbon border adjustment mechanism: climate protection and fair competitive conditions.
To understand the scope of the planned changes, it is essential to first examine the original intention and functioning of the CBAM. The carbon border adjustment mechanism was conceived as a central element of the EU's " Fit for 55 " package, a comprehensive set of measures aimed at reducing the EU's greenhouse gas emissions by at least 55 percent by 2030 compared to 1990 and achieving climate neutrality by 2050.
The CBAM aims to address two core problems simultaneously:
1. Carbon Leakage (CO2 displacement)
A key problem within the framework of ambitious climate policy is so-called "carbon leakage." This describes the relocation of emissions-intensive industries and production processes to countries with less stringent or even no climate protection regulations. Companies might be tempted to shift their production to regions outside the EU to avoid the costs of CO2 emissions incurred within the EU through the EU Emissions Trading System (EU ETS). This would not only undermine the EU's climate targets but also create competitive disadvantages for European companies, which are subject to stricter environmental standards.
2. Creating fair competitive conditions
The CBAM (carbon market adjustment mechanism) is designed to ensure that imports from countries with lower climate protection standards do not lead to an unfair competitive advantage over European products. By levying a carbon price on imported goods produced in emissions-intensive sectors, equivalent to the EU price, it aims to create a level playing field. This is intended to protect European companies while simultaneously incentivizing companies outside the EU to decarbonize their production processes.
How the original CBAM works: A complex system of CO2 pricing at the border
The CBAM is designed as a kind of CO2 tariff levied on selected imported goods. Its functionality can be simplified as follows:
Recording of “grey” emissions
The CBAM aims to capture the so-called "grey" or "embedded" emissions that arise during the production of imported goods outside the EU. These emissions include all direct and indirect greenhouse gas emissions, from raw material extraction and production to the transport of the goods.
CBAM certificates
Importers of goods subject to CBAM regulations will in future be required to purchase CBAM certificates, the price of which is linked to the EU Emissions Trading System (EU ETS). The price of a CBAM certificate corresponds to the current CO2 price in the EU ETS. The number of certificates to be purchased depends on the embodied emissions contained in the imported goods.
Reporting and notification obligations
To accurately capture embodied emissions, comprehensive notification and reporting obligations are in place for importers. They must provide detailed information on the origin of the imported goods, the production processes, and the associated emissions. The European Commission has developed guidelines and methods for calculating embodied emissions, but these have been criticized as complex and bureaucratically burdensome.
Phased introduction
The CBAM (Combined Carbon Mark) is being introduced in phases. Since October 2023, a transitional phase has been in effect, during which importers only have reporting obligations but are not yet required to purchase CBAM certificates. The actual obligation to surrender certificates is scheduled to take effect in 2026 and be fully implemented gradually by 2034. Initially, the CBAM will affect particularly emission-intensive sectors such as iron and steel, cement, aluminum, fertilizers, electricity, and hydrogen. An expansion to other sectors, such as organic chemicals and polymers, is planned.
Reasons for the planned easing of regulations: bureaucracy, burden on SMEs, and competitiveness.
The planned relaxation of the CBAM, in particular the exemption of 91 percent of companies from the levy obligations, is justified by the EU Commission with several arguments:
1. High bureaucratic burden
One of the main arguments for simplifying CBAM is the reduction of the bureaucratic burden on companies, especially small and medium-sized enterprises (SMEs). The original reporting requirements were criticized by many companies as extremely complex, time-consuming, and costly. The detailed calculation of embodied emissions, data collection along supply chains, and the necessary documentation posed a significant challenge, particularly for SMEs.
2. Disproportionate administrative burden with little benefit
Critics argued that the administrative burden for many companies, especially smaller importers with low volumes of CBAM-liable goods, was disproportionate to the actual benefits of CBAM. The costs of compliance, i.e., adhering to CBAM regulations, could in some cases exceed the actual CO2 levies, particularly for companies with low import volumes.
3. Competitiveness of the EU economy
Another important factor in softening the CBAM is concern about the competitiveness of the EU economy. Particularly in energy-intensive sectors, there were fears that the CBAM could lead to additional costs for European companies and weaken their competitiveness in the global market. Simplifying the CBAM is intended to help reduce the burden on companies and strengthen the competitiveness of EU industry.
4. Political and economic realities
Political and economic realities also underlie the easing of the CBAM. The EU Commission is under pressure to reduce the burden on businesses and stimulate the economy, particularly in times of economic uncertainty and rising energy prices. The simplification of the CBAM can be interpreted as a concession to businesses and an attempt to increase public and business acceptance of the Green Deal and climate policy.
Key points of the planned changes: focus on large importers and simplified calculations.
The draft law to mitigate CBAM essentially proposes the following changes:
1. Exception for small importers
The most important change is the introduction of a threshold for CBAM obligations. Accordingly, only importers who import more than 100 tons of CBAM-liable goods annually will be subject to CBAM levies. Companies below this threshold will be exempt from reporting and payment obligations.
2. Exemption of 91 percent of companies
According to the European Commission, this threshold is intended to exempt around 91 percent of the companies currently subject to CBAM obligations. This primarily affects small and medium-sized enterprises that import only small quantities of goods subject to CBAM.
3. Focus on major importers
Although 91 percent of companies are to be exempted, the EU Commission emphasizes that 99 percent of relevant emissions will still be recorded. This is because the remaining 9 percent of importers, i.e., the large importers, are responsible for the vast majority of imports and the associated emissions. Focusing on these large importers is intended to reduce the administrative burden for the vast majority of companies without significantly diminishing the climate impact of the CBAM.
4. Simplification of emission calculations
In addition to introducing the threshold, the methods for calculating embodied emissions are also to be simplified. The details of these simplifications are not yet fully known, but it is expected that the European Commission will allow less detailed and less complex calculation methods. This could include, for example, the use of average values or simplified emission factors instead of detailed calculations at the product level.
5. Adjustment of the threshold for exemptions
It is expected that the 100-ton threshold will be reviewed and adjusted as necessary at regular intervals to ensure that it remains appropriate and achieves the desired objectives. A dynamic adjustment of the threshold may be required to respond to changes in trade and emission patterns.
6. Relief from information obligations
In addition to simplified calculation methods, relief from reporting requirements is also expected. This could include, for example, reducing the amount of information required about third countries, production processes, or supply chains. The aim is to limit reporting requirements to the essentials and minimize the bureaucratic burden for companies.
Impact and reactions: Between approval and criticism
The proposed changes to CBAM have elicited diverse reactions, reflecting a wide range of opinions and interests:
Business approval
The planned simplifications have received particular support from industry and business associations. Many companies, especially SMEs, welcome the reduction in bureaucracy and the focus on large importers. They see the changes as a step in the right direction to strengthen the competitiveness of the EU economy and increase acceptance of the CBAM (Common Market Assessment Procedure). Peter Liese, CDU Member of the European Parliament and climate expert, commented positively on the proposals, emphasizing that the core objectives of the policy project would remain unaffected. He views the simplifications as a pragmatic approach to improving the practical implementation of the CBAM.
Criticism from environmental organizations and climate activists
Environmental organizations and climate activists, however, are criticizing the planned relaxations. They fear that the simplifications could diminish the effectiveness of the CBAM and jeopardize the EU's climate targets. They argue that the CBAM is a crucial instrument for preventing carbon leakage and stimulating global climate action, and that excessive relaxation could undermine these goals. Critics warn that exempting 91 percent of companies sends the wrong signal and could give the impression that the EU is no longer taking climate protection seriously. There are concerns that the simplifications could create loopholes and that companies might try to circumvent CBAM obligations.
Reactions from third countries and trading partners
The changes to the CBAM could also trigger reactions from third countries and the EU's trading partners. Some countries, particularly developing countries, have already expressed concerns about the impact of the CBAM on their exports. They fear that the CBAM will create new trade barriers and hinder their economic development. The simplifications might alleviate these concerns somewhat, but it is expected that the EU will need to continue its dialogue with its trading partners to promote acceptance of the CBAM and avoid potential trade conflicts.
The CBAM as part of a larger reform package to reduce bureaucracy
The relaxation of the CBAM (Corporate Compliance Assessment Procedure) is part of a broader reform package by the European Commission aimed at reducing bureaucracy. This package seeks to lessen the burden on businesses and strengthen the competitiveness of the EU economy. Besides the CBAM, other areas are also affected, such as the EU supply chain law and sustainability reporting. The European Commission emphasizes that this is a comprehensive package designed to strike a balance between ambitious environmental goals and economic competitiveness.
The future of CBAM: Challenges and perspectives
The carbon border adjustment mechanism continues to face numerous challenges and presents both opportunities and risks for the future:
Effectiveness of the simplifications
One of the key questions is to what extent the planned simplifications will actually lead to a reduction in the bureaucratic burden without diminishing the effectiveness of the CBAM. It will be crucial that the European Commission carefully monitors the implementation of the changes and closely observes the impact on businesses and climate targets. Regular review and adjustment of the CBAM may be necessary to ensure that it continues to meet its objectives.
Global acceptance and imitation
The CBAM is a globally unique instrument. Whether it establishes itself as a model for other countries and regions depends on various factors, including its practical implementation, acceptance by the business community, and the reactions of trading partners. Successful implementation of the CBAM in the EU could encourage other countries to introduce similar mechanisms and thus contribute to a global carbon price. However, weakening its implementation too much could signal that the EU itself is no longer fully convinced of its own instrument and hinder global replication.
Expansion to other sectors and emissions
The European Commission is already examining an expansion of the CBAM (Climate Control Assessment Model) to include further sectors and emissions. The inclusion of organic chemicals and polymers is under discussion, and the long-term plan is to include all goods covered by the EU Emissions Trading System. Expanding the CBAM to further sectors and emissions would significantly increase its climate impact, but would also further increase its complexity and bureaucratic burden. It will therefore be crucial to consider the lessons learned from the first phase of the CBAM in future expansions and to maintain a balance between climate impact and practicality.
Technological development and innovation
The CBAM can also act as an incentive for technological development and innovation in low-emission production processes. Companies that invest in low-emission technologies and decarbonize their production processes can reduce their CBAM levies and gain a competitive advantage. The CBAM could thus make a significant contribution to the transformation of industry and the achievement of climate neutrality.
A balancing act between climate protection and economy
The planned easing of the EU's carbon border adjustment mechanism highlights the complex challenges and the necessary balancing act between ambitious climate targets and economic competitiveness. The simplifications are an attempt to reduce the bureaucratic burden on companies and increase acceptance of the CBAM without jeopardizing the core objectives of this climate protection instrument. Whether this balancing act succeeds will become clear in the coming years. It will be crucial to carefully monitor the implementation of the CBAM, closely observe its impacts, and adapt the mechanism as needed to ensure its long-term effectiveness and acceptance. The CBAM remains an important and innovative instrument in the fight against climate change, and its further development and global dissemination will be of great importance for achieving global climate goals.
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