EU #CBAM proposal was leaked today. While the main elements may not come as a surprise to those having paid close attention to this file in recent months – a few things are worth unpacking, especially as trade partners gear up to react. 👇A thread 1/n
On the table is a limited tool oriented towards managing domestic interests over external and climate considerations. It will initially cover a handful of sectors which, over time, can be extended to other ETS sectors deemed at risk of carbon leakage. Thus, final products... 2/n
.. will likely never be covered. The compliance mechanism will be a notional ETS, meaning exporters to the EU purchase credits at similar prices of the #EUETS and surrender those at the end of each year to cover their products' actual embedded scope 1 and 2 emissions 3/n
Those actual emissions are to be verified by third parties accredited by a new CBAM authority. If no verification is carried out, a default value applies equal to the 10% worst EU producers. Moreover, any carbon price already paid domestically gets subtracted from the CBAM 4/n
No export rebates are foreseen, increasing WTO compatibility. Lastly, a transition period of [three?] years will be built-in to manage the administrative complexity. 5/n
Sounds great? Well, not really. As always the devil is in the details. Free allocation is maintained through a ‘transitional provision’, meaning the CBAM will only cover a small share of emissions, thus severely limiting its environmental effectiveness 6/n
So how long will this ‘transition’ last you ask? We don’t know – the hot potato seems to have been passed on to the ETS proposal, which will have to determine whether and how fast free allocation is phased-out. While this will limit initial compliance costs of the EU CBAM … 7/n
…it might also be interpreted as ‘double protection’ by trade partners. Moreover, with all revenues proposed to go to the EU budget, no exemptions foreseen for #LDCs and no recognition of non-carbon pricing policies, trade partners might react strongly… 8/n
…criticizing the EU for violating the bottom-up approach of the #ParisAgreement and the principle of #CBDR by forcing third countries to apply a carbon price and make emerging economies help pay off the EU’s debt. 9/n
In conclusion, the CBAM is likely still going to be a big political lift without all that much to show for it in terms of climate action. Will the EU be ready to face a possible international backlash? 10/n
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