Ref. Ares(2021)3066394 - 07/05/2021
European Commission Public Consultation
on the Carbon Border Adjustment
Response of AEGIS Europe
28 October 2020
AEGIS Europe is an industry alliance that brings together more than 20 European trade
associations committed to manufacturing in the EU, a truly level playing field, and the
fostering of growth through rules-based free and fair international trade. Our members
account for more than €500 billion in annual turnover, as well as for millions of jobs across
the EU. We support the goals of the European Union to fight climate change and make Europe
the most sustainable economy globally. To achieve those goals, it is essential that the EU put
in place policies that strengthen the Union's manufacturing industries and keep EU
manufacturing value chains competitive.
A general remark in relation to the Commission’s consultation on the carbon border
adjustment mechanism (CBAM) is that many of the questions are so vague that answers could
be misinterpreted or, even worse, might be used to justify a course of action which AEGIS
Europe did not intend to support. Accordingly, AEGIS Europe only answers those questions
which it views as unambiguous.
This note which accompanies the questionnaire response highlights the issues of highest and
common concern for EU manufacturers regardless of the option chosen for the CBAM
legislative proposal.
Free allowances and indirect costs compensation must remain
First and foremost, AEGIS Europe wishes to highlight that regardless of the form the
Commission might propose for a CBAM, and the sectors and products to which it would apply,
the introduction of a CBAM cannot be seen as a justification for the ending of free allowances
and indirect costs compensation.
It is absolutely necessary to maintain free allowances and indirect costs compensation under
the ETS reform in order to avoid abrupt modifications of the legal framework and disruptive
impacts, as well as to minimize the impact on downstream partners in the value chains.
Indeed, the impact of the introduction of the CBAM would depend very much not only on its
design, but also on the manner of its implementation and enforcement. In any event, a CBAM
cannot simply and automatically be seen as compensating the loss of other EU measures
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intended to counteract carbon leakage, especially in the light of the EU's increased climate
ambitions.
In addition, even if the CBAM itself were reimbursed with regard to products exported from
the EU, a CBAM would not address the carbon leakage related to the ETS costs of sectors
which export. With the increase in EU climate ambitions, those costs are only going to rise,
and a CBAM would not address this aspect of the difference in climate ambitions between
the EU and third countries. Thus, free allowances must be maintained, and even additional
measures will be needed, to safeguard a level playing field and the export competitiveness of
EU manufacturers.
Furthermore, indirect costs compensation addresses the carbon leakage risk related to the
indirect carbon costs of electricity (which refer to the carbon costs in electricity use) in the EU
rather than indirect emissions (which refer to carbon emissions in electricity).
For all these reasons, the introduction of a CBAM cannot be a justification for the ending of
existing free allowances and indirect costs compensation.
Complementary measures are essential for sectors where a CBAM would not be effective
against the risk of carbon leakage
A CBAM would not be effective for some sectors highly exposed and facing investment and
carbon leakage, making it essential to consider complementary measures for them, in
addition to free allocations and indirect costs compensation maintained at the level currently
foreseen for Phase IV of the ETS, to ensure the equal treatment of all products placed on the
EU market with regard to the costs and limitations of decarbonisation measures.
In particular, because carbon leakage is a reality and will increase with the EU's higher climate
ambitions, additional complementary measures need to be considered for sectors and
products for which a carbon leakage risk is identified but to which a CBAM would not apply.
For some, product manufacturing standards could be one tool to limit access to the EU market
of products representing a carbon footprint above a certain threshold, and thereby limit
carbon leakage to the extent products made in the EU have a carbon footprint below that
threshold.
In any event, these complementary measures must first be identified and then elaborated
and assessed in close consultation with concerned stakeholders, including industry.
A CBAM would need to apply to all imports of a given product regardless of source or origin
Regardless of its form, and to be coherent with the aim of encouraging global efforts against
climate change, a CBAM would need to apply to imports from all sources, whatever the trade
or economic designation of those sources. In other words, there should be no exceptions for
developing countries, least developed countries or countries with preferential trade
arrangements with the EU. Allowing for exceptions would not be coherent with the EU's green
objectives and it would simply complicate administration as well as increase opportunities for
circumvention.
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The only possible adjustments of the cost element of any CBAM, including the establishment
of linkages with third country carbon costing and reduction mechanisms, must be conditional
on the provision of verifiable data which is in fact verified to establish effectively comparable
carbon costs and reduction obligations in the places where the essential manufacturing steps
occur, with proper mechanisms also in place to address non-cooperation (even partial),
circumvention, absorption, source shifting, etc.
The measurement of emissions for imports must avoid giving importers undue advantage
The measurement and definition of the carbon footprint of imported products is critical to
the creation of a robust and effective CBAM, regardless of the form of the CBAM.
Ideally, the EU must introduce full carbon accounting for all products placed on the EU
market, covering the entire value chain, upstream and downstream, from the primary raw
materials and other inputs (including energy) down to final end products, and include
transport to the EU port of final destination. This would require a thorough analysis of the
whole supply chain for each sector in order to capture sectoral specificities and needs,
especially during any transitional period.
This in turn would require an entire administration capable of investigating the total
manufacturing emissions in the places where the essential manufacturing steps occur,
including a proper and efficient system of measurement, with incentives and sanctions to
maximise the cooperation of importers and their third country suppliers. As a baseline
principle, access to the EU market should be granted only to those third country producers
that provide their data in a timely and complete manner, and allow it to be verified.
To the extent a transitional system based on default values is used until full carbon accounting
is possible, the methodology used must
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not allow free-riding or increase substantially the risk of avoidance that would
undermine the environmental objective of the measure;
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avoid giving an undue advantage to importers, especially as the carbon footprint of
EU industry must decrease under ambitious climate targets written into EU law;
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reflect the relevant cap or limitation on EU carbon emissions, as well as the cost for
those emissions which are permitted.
This implies that any default values used for the measurement of emissions and the related
charge would need to be set at a sufficiently high level, and that the system be resourced and
flexible enough to adjust rapidly to trade flow manipulation.
The use of EU benchmarks (which are based on the best 10% of EU installations) would
undermine entirely both the environmental rationale of the CBAM and its effectiveness.
Indeed, it would represent unrealistic assumptions about the carbon footprint of third
country production, and would not provide any substantial incentive for importers and third
country producers to cooperate and reduce their carbon emissions.
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To the extent actual data would be utilised, there would again need to be a baseline principle
that access to the EU market would be granted only to those third country producers that
provide their data, for all their production, in a timely and complete manner, and allow it to
be verified.
In addition, exporting producers and importers must be required to provide data for total
production of all related companies so as to allow the identification of significant source
shifting / shuffling potential (i.e. the potential to avoid a CBAM by sending to the EU products
with a low carbon footprint and selling on other markets products with a high carbon
footprint).
In relation to verification, it is essential that there be controls on the measurement of
emissions by independent bodies specifically authorised by the EU for such purposes. Those
bodies must be subject to the requirements, controls and sanctions laid down by EU law.
It would in any event not be acceptable simply to make use of the Commission Product
Environmental Footprint method, which does not measure the carbon footprint as such and
has issues in its implementation.
Downstream carbon leakage must be avoided
In relation to each of the options described in the Commission's CBAM questionnaire, there
is an indication that a proposed CBAM would apply only to certain sectors considered to be
at risk of carbon leakage, and even then only to a selection of products of those sectors. While
the overall impact of a CBAM would depend on the exact design of the measure, this
selectiveness in the application of a CBAM raises a concern about the possible increased risk
of carbon leakage of EU industries operating downstream from the sectors to which the CBAM
would apply, when those sectors are also exposed to global competition and cannot pass on
carbon costs without the risk of losing market share.
At a minimum, to the extent the scope of the CBAM would be fixed to cover only selected
products within certain sectors for some period of time,
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existing carbon leakage measures need to remain in place in order to mitigate the
possible impact on downstream sectors,
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the CBAM should be extended if feasible to certain downstream products as
appropriate and with the agreement of any sectors concerned, based on an evaluation
of the cost impact on operators in those downstream sectors, as well as of the degree
of their exposure to the various forms of carbon leakage that might result from the
CBAM itself.
The extension of the CBAM to certain downstream products should occur both:
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at the introduction of the CBAM, when justified based on an initial evaluation of the
downstream cost impact and carbon leakage exposure, and
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at any point following the introduction of the CBAM, when justified based on an
updated evaluation of the downstream cost impact and carbon leakage exposure.
In any event, any CBAM on inputs should be rebated upon export of downstream products
from the EU as necessary and consistent with the environmental rationale of the CBAM and
the intention to provide an incentive for third countries to introduce proper carbon costing
mechanisms.
Sanctions must be timely and effective to preserve the integrity of the CBAM
There must be strong sanctions for any non-cooperation (even partial) by importers or third
country producers. Non- or partial cooperation includes the submission of untimely,
incomplete, false or misleading emission footprint declarations, or the lack of full cooperation
with on-site verification visits at the places where essential manufacturing steps occur. EU
importers must have final legal responsibility for the veracity of declarations and those
without an adequately clean track record must be required to put up sufficient guarantees
prior to importation.
In addition, a CBAM framework must provide effective and timely sanctions of any
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source shifting / shuffling;
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absorption of the carbon emission costs by the exporting producer/importer, as well
as any government subsidisation of those costs;
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activities undertaken to circumvent the application of the CBAM.
For example, major source shifting / shuffling could be sanctioned with a surcharge on the
existing CBAM, a shift to a default value CBAM at a sufficiently high level, or the measurement
and allocation of a carbon footprint determination based on total production emissions of a
given producer, or of a given country's producers in cases where there is substantial State
involvement in setting industrial policy for that sector.
It is to be noted that circumvention activities may include the activities of individual
companies, the activities of a combination of companies, or the activities of one or more
entities under the direction of governments or government agencies.
In any event, any failure (even partial) of third country producers to provide full and timely
cooperation in an EU investigation of such activities should result in the denial of EU market
access to their products.
Third country linkages must be based on compatible systems, monitored and enforced
Any agreements for linkage with third countries must be predicated only on comprehensive
and effectively implemented carbon pricing across borders at a level of ambition which is at
least high as the EU's and results in similar costs and limitations for a similar carbon footprint
in a given sector. Such agreements must also include provisions for adequate monitoring,
verification and sanctions.
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The EU must not delay the application of a fully effective CBAM due to pending discussions
about linkages with third countries.
Additional administration is inevitable in relation to an effective CBAM, but clear EU-level
rules, including an importer pre-notification requirement, can foster efficiency
The establishment, implementation and verification and enforcement of a proper CBAM
mechanism will unavoidably involve new requirements for EU importers and third country
exporters, as well as require additional EU and Member State resources. The aim to minimize
the additional burdens cannot outweigh the need for the CBAM to be sufficiently robust,
enforceable and enforced in order to contribute meaningfully to the attainment of the EU's
climate objectives.
Specifically, there need to be sufficiently detailed rules at EU level to ensure the availability
of complete and timely information, and the application of effective and dissuasive Member
State measures to penalise avoidance. In addition, there needs to be sufficient Commission
involvement to handle properly contacts with third country producers and to ensure a
harmonised approach to the application of the CBAM.
In order to allow Member States to be most efficient in the implementation of a CBAM, all
importers should be required to pre-notify to the relevant EU customs authorities complete
CBAM-related information concerning the imports, including the places where the essential
manufacturing steps have occurred or are occurring and full details of the carbon footprint
determination, so as to allow sufficient time for appropriate controls.
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