THE STATE OF THE EUROPEAN UNION Towards a new legislative term

THE STATE OF THE EUROPEAN UNION 110 of the EU from resulting in a competitive disadvantage for European companies compared to their counterparts from third states. Phasing in the CBAM The CBAM is scheduled to start taking effect in 2026 on a limited number of goods that are particularly vulner- able to the risk of carbon leakage, namely cement, steel, aluminium, fertilisers, electricity and hydrogen. The idea is that by 2034 the border tariff will extend to the same carbon-intensive products that are subject to the Euro- pean emissions allowance system internally. But the first stage stipulated in the recently approved EU reform is a transitional phase between October 2023 and December 2025. During that time, importers must obtain authorisation from the EU before beginning to purchase certificates for their carbon emissions. In this preliminary phase, importers will merely pro- vide information about their emissions. The idea is to give Europe’s trading partners and the importing com- panies affected by the CBAM time to negotiate with the EU authorities and develop methods of measuring and certifying the emissions from their production processes. The CBAM and observance of World Trade Organisation (WTO) rules In principle, the CBAM will not contravene WTO rules on trade discrimination. As stated previously, this tariff seeks to levy the same carbon prices on imported prod- ucts as those paid by European goods so that the cost borne by both types of products is equal. That is not the case with the United States’ new cli- mate law, known as the Inflation Reduction Act, which through the selective granting of subsidies and tax breaks for its green industry gives “preferential” treat- ment to local production over imported goods (local content requirements). True, to avoid any risk of breaching WTO rules on the part of the EU it is important that CBAM introduction goes hand in hand with the removal of the free allow- ances favouring certain European industrial sectors. On this point, it is worth remembering that the reform approved in April provides for the phasing out of free al- lowances to begin in October 2023 and end in 2034. A swifter removal would have been preferable to ensure it remained in sync with the process described above. It is important to underscore that the CBAM and free allowances cannot at any time apply to the same type of product. That would be tantamount to demanding a carbon price from non-EU producers while exempting European industry from payment. In this case, it would be a clear scenario of trade discrimination in contraven- tion of WTO rules. The CBAM as a key instrument of the European Green Deal’s external dimension with a view to raising global environmental standards Further evidence that the CBAM is not inherently dis- criminatory or protectionist lies in its main purpose. It is not to protect national producers, or even to obtain ad- ditional public resources, but to incentivise third states to raise their climate ambition in line with internation- ally agreed targets. Indeed, the ideal outcome for the EU would be that nobody pays the CBAM. That would mean that other parts of the world had established carbon prices equiva- lent to the Europeans and, therefore, CBAM application had been “neutralised”. On this point, nations such as New Zealand, Canada and India are currently consid- ering creating similar domestic carbon markets to the European one. Another means of avoiding the tariff is for the coun- try in question to use a different method to carbon pricing, but which is equally effective when it comes to meeting international decarbonisation goals. Either way, the high standards the EU has placed on itself, particularly since the reform approved in April, allow Europe to send out a strong signal to the rest of the world about the urgent need to raise the ambition of national cli- mate policies and tackle the growing climate emergency. And this is where the role of the CBAM is key, as it is designed to stimulate climate action from its trading partners. In this respect, the CBAM is a powerful geopo-