Most Favoured Nation: CBAM Dominoes
CBAMs all the way down, and export controls
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This week the EU inched one step closer towards signing off its proposed carbon-border adjustment mechanism (CBAM).
As discussed in MFN many times, the CBAM would require importers of covered goods to register with a new CBAM authority, measure the carbon intensity of their imports, purchase CBAM carbon certificates [price linked to the cost of 1 tonne of carbon under the EU Emissions Trading Systems], and surrender the requisite number of certificates at the end of every year.
In the first instance, the CBAM would apply to imports of iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, as well as some precursors and a limited number of downstream products.
Now, there’s still a little way to go — the EU still needs to decide what is going to do vis-a-vis the phasing out of free allowances under the ETS and potential export rebates before the CBAM is fully finalised – but I think we can work on the assumption that CBAM is happening, and border carbon taxes [or at least the EU’s slightly complicated version] have finally arrived.
Which, will lead to quite a lot of fun conversations. It will, for example, place additional pressure on the Northern Ireland Protocol (unless the UK does the slightly obvious thing and link its own ETS to the EU’s). An EU CBAM also means we should expect CBAMs, border-carbon taxes, whatever you want to call them, to proliferate.
Why? For the exact same reasons Trump’s trade war tariffs on steel and aluminium led to other countries following suit: fear of trade diversion.
The EU’s justification for following Trump and imposing its own 25% tariff on steel imports from the rest of the world was not “we agree with the US that imported steel is a national security threat”. Rather, the EU imposed the tariff to prevent all of the steel that would have otherwise been exported to the US being diverted into the EU. A classic trade safeguard.
The same logic applies to CBAM.
If effective, carbon intense products will become more expensive to import into the EU, making these products less competitive. This could lead to foreign exporters making a greater effort to sell their high carbon products to buyers in other markets. This will (probably) lead to producers in those markets complaining about increased [unfair] competition. Which will lead to new pressure on non-EU governments to introduce their own version of CBAM.
To illustrate, I have produced a helpful infographic:
I suppose once everyone starts panicking there are two main options.
The first is that lots of other countries start unilaterally introducing their own measures. These could be structured like CBAM, but also could, in practice, be more partially applied and involve, for example, a ramping up of anti-subsidy or safeguard duties, new taxes, regulatory restrictions, labelling requirements, etc.
The second is that a number of like-minded countries get together to form a climate club, whereby trade between those within the club goes unpenalised, whereas imports from outside are subject to carbon penalty. The US has been trying to get something like this going in respect of steel — MFN readers will remember the Transatlantic Green Steel Cartel of late 2021. The US and EU have reportedly recently discussed a concrete US proposal to levy “carbon tariffs” on Chinese steel. The problem with the climate club idea is that one of the main countries who would want to be involved *cough* the US *cough* doesn’t actually have a domestic carbon price and is mainly using the climate framing to justify ever increasing protection for politically significant domestic industry (while also not acting very club like elsewhere, see: the IRA).
So while two is preferable, it’s also harder. Which means that in the short-term we will probably see more discussion about option one. Which means, at the very least, more things for me to write about.
National security
This week China initiated a WTO dispute against the US over Washington’s new export controls on high value semiconductors and the tools used to create them.
The first thing to say is that this will in no way whatsoever lead to the US changing its approach. As evidenced by its response to losing a recent WTO case over the aforementioned Trump trade war tariffs (where it effectively told the complaints and the WTO to do one), it does not care.
However!
Some other countries do still care (a little bit) about complying with their WTO obligations. Or rather, to reframe slightly, if the fear of being in breach of their WTO obligations allows them to push back against US pressure and refuse to do things they don’t actually want to do then … they might very much care about complying with their WTO obligations.
Take Japan and the Netherlands, for example. The US really wants both of these countries to replicate US export controls, but they don’t really want to. The WTO case gives them another reason to say no … at least for a little bit longer.
As ever, do let me know if you have any questions or comments.
Best,
Sam