THE STATE OF THE EUROPEAN UNION Towards a new legislative term

THE EUROPEAN GREEN DEAL AND CARBON LEVIES: THE CARBON BORDER TAX AND REVISION OF THE EUROPEAN EMISSIONS MARKET 109 Lastly, the system for the aviation sector will be tight- ened with the reform given its considerable polluting potential, and despite its inclusion in ETS I since 2012. The number of free emissions allowances allocated to this sector will be reduced over time and phased out completely by 2026. The use of sustainable fuels in the aviation sector will also be promoted. Removing free emissions allowances The phasing out of free emissions allowances was one of the key points in the EU negotiations leading up to the reform of the ETS. It was eventually agreed that the process will start in October 2023, reducing these al- lowances to nearly half by 2030 and completely remov- ing them by 2034. The aviation sector, as we have seen, faces a more challenging reduction time frame. Thanks to these free allowances, certain industrial sectors have managed to avoid paying anything for their carbon emissions since the European carbon market was established in 2005. There is no question their prolifera- tion has been a major obstacle to achieving the desired progress towards the EU’s decarbonisation goals. To be fair, allocating free emissions allowances was initially conceived as protection against the phenomenon of “carbon leakage”, that is, the risk of European produc- tion relocating to countries with laxer climate policies. Indeed, the increase in climate ambition represented by the ETS meant that certain European companies under the scheme were tempted to shift production to jurisdictions with no carbon pricing at all (or lower prices), thereby cutting their energy costs. Carbon leak- age is directly detrimental to the EU economy. In ad- dition, instead of becoming cleaner, it prompts certain production processes to simply move outside European territory, circumventing the climate efforts laid down in EU law. Granting free emissions allowances was intended to give producers, importers and traders from the energy intensive sectors or those sectors most commercially exposed to carbon leakage time to adapt. The fact that these free allowances have lasted to this day also has much do with the effective lobbying from the sectors that benefit from perpetuating these exceptional treatment. The Carbon Border Adjustment Mechanism (CBAM), a powerful EU geopolitical tool serving climate goals The CBAM is a standout feature of the climate legisla- tion approved in April. It has major geopolitical reper- cussions and affects international trade. The function of safeguarding against carbon leakage performed by the free emissions allowances until now will gradually shift to the CBAM. Yet unlike the free allowances, the CBAM will not slacken the pace of the EU’s decarbonisation, far from it. As we shall see, this tariff will be a major spur for other regions of the world to raise their climate ambitions to the levels required to contribute effectively to achieving the globally agreed climate goals. How the CBAM works The CBAM will work as a tariff on imports of carbon- intensive goods from outside the EU. The importer will pay at the border, that is, in the moment they want their products to enter the single market. Payment of the tariff will be made through the pur- chase of certificates. The amount will depend on the carbon content of the imported goods, the benchmark being the carbon price EU producers would pay for those same goods under the European emission trad- ing system. Specifically, the price of the certificates will be calculated according to the weekly average auction price of EU allowances. If the products made in the countries of origin have paid lower carbon prices than EU companies bound by the ETS would have paid, the purchase of certificates will also be required in order to make up the difference. Under the CBAM, then, imports will be taxed in such a way that the emissions pollution cost of producing the same product inside and outside of the EU will be equal. The carbon price of goods purchased by Europeans in the single market will also be the same, regardless of whether they were produced inside or outside of the EU. In short, the CBAM will serve to level the playing field between EU and non-EU producers. This new mecha- nism will prevent greater climate ambition on the part