Thread by @TennantReed

#cop27 CBAM side event about to start at the Morocco Pavilion, Area C Building 2. Featuring great experts galore, and me!

First up Tim Figures at BCG: seeing intensifying interest from business in what was once an academic concept. EU now probably bringing one in from 2026. No doubt that CBAM is really cutting through to boards of energy intensive multinationals in Europe and beyond.

TF: vmCBAM goes together with EUETS reform and impacts the competitive calculations and investment decisions of domestic producers. Importers interested in how to minimize their exposure. Clearest way is to reduce carbon content - this is unlike a border tax or tariff.

TF: if it drives importers to reduce carbon content to avoid adjustment, it will meet one of the designers’ goals.
Many ways to improve policy:
Practical implementation challenges - how to take many different products worldwide and calculate carbon content?

TF: How to extend to complex goods like cars? How to deal with scope 3 emissions?
EC says: good question, let’s review in 2025 and maybe cover if we find a way. If they do, the scheme@will be even more impactful.

Next Sabine Frank from Carbon Market Watch, a NGO advocacy org focused on carbon pricing. We look at CBAM as a complement to the ETS and the Fit for 55 plan; also a tool to encourage trading partners to be more ambitious. So fits the Implementation COP’s themes well.

SF: what’s changed in last year? EU process is nearly done, optimistic we’ll have a deal by end of December. 3 Trilogue negotiations so far. Latest yesterday! Fresh info:
Scope of industries included: EC wanted steel, cement, aluminium, fertiliser. Parl also wants plastic & H2

SF: CMW encouraged inclusion of more sectors to enable phaseout of free allocation, an alternative carbon leakage prevention measure. Less allocation means more incentive to decarbonise.

SF: export rebates also discussed in trilogues. Associations have argued hard for this, EC is standing fast against it, looks like other institutions will bend to EC but trade off on other differences.

SF: phaseout of free allocation: almost certain phaseout won’t happen before 2032, but CBAM starts 2026. Bargaining involves push for 2036 allocation phaseout. CMW wants immediate phaseout. 10 year overlap of free allocation with CBAM is unjustifiable double protection

SF: industry lobby has prevailed over interests of the climate. Instruments to take us to 2030 are being treated as solutions to current energy situation.

SF: Other positions by CMW on trading partners and global impact:
Revenues should be earmarked to support climate action in trade partners. State of play however is that revenue goes to EU own resources, paying off debts for COVID Recovery package.

SF: Parliament asks for indirect earmarking of CBAM revenue for climate action in partner countries. Difference not yet tackled in Trilogues, but some chance of positive outcome.

SF: at COP, climate finance is a key topic. Countries affected by CBAM should use COP to push their position on this.
CMW favours special treatment for LDCs - technical support, partial exemption.
CMW thinks EU should take diplomatic action to make CBAM a partnership

SF: initial estimates of trade impact should be improved with new data.

Next Gordon Bennett of Inter Continental Exchange, largest energy/enviro marketplace in the world and own the NY Stock Exchange
GB: most of world carbon allowances trade on ICE.

GB: power market in Europe is one of the few that has been treating carbon as a liability. Whole point of carbon market is to pay for pollution. We’ve mispriced energy when we haven’t paid for the use of the atmosphere.
Power market won’t be hugely affected by CBAM, however.

GB: CBAM important because we need more industries to be subject to similar pressures as power market: treat carbon as a liability. With more carbon tonnes at risk, there will be more incentive to abate in industry. Free allocation blunts that.

GB: with a global cap and trade program I’d be confident we’d solve the emissions problem, but a CBAM approaches that ideal country-by-country.

Next Oliver :
What’s the motivation for EUCBAM? It’s not protectionism, it’s about reconciling very ambitious emissions targets and high carbon prices with industry competitiveness. Input costs for some could rise sharply with low/zero emission, how can they be viable?

O: free allocation becomes unsustainable with deep cuts in caps.
But there are very specific rules that must be applied so as not to breach WTO. EU insists it will comply, they’re very sensitive, multilateral system is very important to them.

O: is CBAM WTO compatible? Nobody knows! Rules not set up for the current context. Lawyers that pretend to know are pulling the wool over your eyes a bit. But some principles apply.
Non discrimination; Most Favored Nation; National Treatment (treat foreign goods like local
Treat

O: are products like products? Case law leans to saying manner of production doesn’t affect “like product”. But EU lawyers fall back on Art 20 of GATT exemptions for special circumstances to allow discrimination, eg for protecting health or natural resources. EU could prob use.

O: exemptions have rules too: fairness, proportionality, no disguised protectionism. EU taking great care to do this:
- not including cars and complex products but basic materials with high leakage risk.
- phasing out free allocation in inverse proportion to CBAM, no doubling

O: - decision that if foreign producers reduce emissions they will pay a lower charge, like EU producers.
- discount for foreign carbon charges

But open question is exports. Export rebates can be provided for indirect taxes; unclear that this is one. Some controversy.

O: actual economics diverge from WTO rules. There’s not necessarily a distortion from a trade rebate, but the law supposed there is. WTO Rules are maybe not up to the job. Important as they are, some reform or clarification is needed on industrial decarbonisation issues.

Next: me! But I couldn’t livetweet myself, sorry. Will try to tidy up at the end.

Next next: Zhibin Chen from Ecosystem Market Place - ICAP and Chinese perspectives
ICAP: believe CBAM can speed carbon pricing all over the world. We’re seeing many countries accelerate.

Zhi: lots of carbon market instruments are emerging and we generally welcome this.
CBAM is a tool and technical detail matters - if not designed well, could be a trade barrier.
China already has a carbon market and capacity for MRV. Most developing countries don’t.

Zhi: if EU framework isn’t simple MRV, it’ll cost a lot for producers to export to Europe - effective trade barrier.
Accuracy of numbers must be balanced by cost and feasibility.
How to recognize carbon price of other jurisdictions is critical.

Zhi: pricing systems are designed very differently - in some companies can earn money from emissions. Complex to compare!
How does EU verify payments? Needs cooperation between governments, standard to be unified.

Zhi: China mostly exports machined products, not raw products, 1% or less of exports affected. CBAM not a big issue, especially as China has announced carbon peaking and reduction policies. Eg aluminium producers have moved production from high- to low-emissions power regions

Zhi: a portion of Chinese products will be low carbon and will be able to be exported to EU. But they need to know how to verify; they may be subject to a local Chinese standard, a national report and an EU standard. Confusing multiple data sets! Need a clear standard to use.

Zhi: in China we have lots of local verification companies. Can they qualify for EU CBAM verification? Need to know.
Also some worries about EU taxonomy - idiosyncratic definitions. EU should engage with more countries to define frameworks to benefit all.

Q&A
Q: what about countries that lack capital and climate frameworks to invest in cleaner production? Also need single global system to avoid double counting.
O: we need global support for best techs to spread. German Climate Club may help

Q: which governments are furthest in considering their own carbon taxes in response to CBAM?
T: exporter companies are neither better or worse off re CBAM if their home country levies a carbon tax. But the home country gets revenue (from European consumers!)

S: Turkey only recently joined Paris Agreement - because of CBAM

Q: will China increase its carbon price ceiling?
Z: Chiba is extending MRV and coverage to more sectors, potentially steel; CBAM May speed that.
China’s system is 100% free allocation; how EU and China communicate matters, but EU may think there’s no effective carbon price.

Z: China says it’ll substantially expand coverage of ETS in 2025.

Addendum: I now have time to relate my own remarks on #cbam!
There is a little discussed aspect that is key to internal and external impacts and debates about fair treatment of trade partners in general and developing countries in particular: incidence. Who really pays CBAM?

Me: obviously at the border the supplier/agent literally pays for the CBAM units. Their cost of supply goes up.
But their selling prices will also go up if the EU applies CBAM evenhandedly with its ETS.
That greatly alters the impact on profitability versus cost.

Me: Because every supplier of a CBAM-covered good to a European customer will face a carbon cost (via EUETS or CBAM) or bear costs of zero-C production, customers will not be able to avoid cost pass-through.

Me: suppliers will recover at least some, perhaps all, maybe more than all, of their carbon costs - depending on their carbon efficiency versus other suppliers.
So to a very large extent, customers in Europe pay for CBAM.

Me: this understanding is pretty transformative. Exporters (including developing) are not necessarily disadvantaged at all, as long as they keep up over time with the market’s pace of decarbonisation.

Me: Many exporters certainly can keep up (some EU producers are worried about being outcompetes by cleaner foreign producers making mega-investments in zero-c facilities).
But attention is needed to developing/LDC access to finance, tech, MRV to keep up.