<h3>Introduction</h3>
The European Union will implement a Carbon Border Adjustment Mechanism (CBAM), in order to address potential carbon leakage due to ambitious climate policies. However, there are concerns regarding the climate justice implications of this measure. We provide evidence from a recent study that that there is an unequal distribution of CBAM impacts with most countries facing relatively high risks located in Africa and South-Eastern European countries. Therefore, CBAM could shift the burden of fighting climate change to more vulnerable low-income and middle-income countries who are less responsible for climate change.
We suggest ways to mitigative these risks and ensure international cooperation to fight climate change:
<ul>
<li style="text-align: justify;">Use the revenues generated through the EU CBAM to support decarbonization and strengthen emissions monitoring and verification capacities of low-income and middle-income countries.</li>
<li style="text-align: justify;">Continue and intensify consultations with stakeholders outside the EU and involve such stakeholders in CBAM design.</li>
</ul>
<h3>Introduction</h3>
The European Union (EU) will implement a Carbon Border Adjustment Mechanism (CBAM), which is meant to combat carbon leakage in the wake of its ambitious European Green Deal. But what will the impacts on other countries be? Most of the debate remains focused on key trade partners like the United States (US) and China, or on World Trade Organization (WTO) legality. However, increasingly concerns are raised regarding the climate justice implications of such a measure. Indeed, if not properly designed CBAM risks shifting the burden of fighting climate change to more vulnerable low-income and middle-income countries who have historically contributed only minimally to the current climate change crisis. This would violate the principle of &ldquo;common but differentiated responsibility and respected capabilities&rdquo;. We argue that the EU must take into account the vulnerability of those countries to its policies, especially given the complexity of tracking carbon emissions, and use some portion of CBAM revenues to help set up carbon tracking infrastructure. Although measures to stop carbon leakage are clearly important, the EU must keep in mind the way its actions are perceived by stakeholders in the Global South &ndash; or it risks being blindsided by opposition at the next COP.
<h3>What is CBAM?</h3>
Europe has set the ambitious goal of going net zero by 2050. However, this raises concerns among some (especially in industry) that environmental standards will make European products more expensive. For example, if European producers have to pay high carbon taxes to make &lsquo;green steel&rsquo;, then EU steel would not be competitive with steel coming from a country with no carbon tax. People would buy cheaper &lsquo;dirty&rsquo; steel, and European steel sellers would close down &ndash; meaning that in the end no &lsquo;green&rsquo; steel&rsquo; is produced in Europe, while even more &lsquo;dirty&rsquo; steel would be produced abroad.
This process is called &lsquo;carbon leakage&rsquo;: instead of emissions getting lower around the world, production moves to a new location and emissions stay the same or even increase. It is not only a problem for the environment, but also for policymakers who clearly do not want important industries leaving their shores. Until now, the EU&rsquo;s response to the problem of carbon leakage was to give producers of high-emissions products a &lsquo;free allowance&rsquo;: producers who emitted under a certain amount were exempt from paying in the EU Emissions Trading System (EU ETS), but these free allowances should be phased out slowly so that industry has an incentive to decarbonize.
Now, the idea is to replace these &lsquo;free allowances&rsquo; with CBAM. This would mean that if products are imported into the EU, the EU carbon price would apply to them. Importers would have to buy carbon certificates, unless the non-EU producer can show that they paid an equivalent price for carbon in the country where the product was made. The EU frames this as a way to make sure that <a href="https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661">non-EU countries are incentivized to &lsquo;green&rsquo; production</a> &ndash; and ensure a level playing field for EU firms. It would apply to industries that are quite prone to carbon leakage like cement, steel, aluminum, chemicals, and fertilizers.
<h3>Recent developments </h3>
The EU is now hotly debating how the CBAM will actually work. The European Parliament has managed <a href="https://www.euractiv.com/section/energy-environment/news/tired-eu-parliament-agrees-carbon-pricing-compromise-ahead-of-council-clash/">to enter an agreement</a> as of June 22 &ndash; now the European Commission, the Council of the European Union and the European Parliament will have to debate about the final policy design. Some of the issues that will still need to be decided include:
When will the CBAM be phased in? The Commission <a href="https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661">originally suggested</a> that the CBAM should begin just by tracking emissions in 2023, and importers would have to start paying for pollution by 2026. But the European Parliament has pushed for the CBAM <a href="https://www.euractiv.com/section/emissions-trading-scheme/news/parliament-groups-strike-compromise-on-eu-carbon-market-reform/">to apply starting in 2033</a>, as well as giving the &lsquo;safety net&rsquo; of continued free allowances for industry if the CBAM does not start by then.
When will free allowances for the EU ETS be phased out? According to the Commission, between 2026-35; Parliament suggests between 2027-2032. The problem is that if the EU gives its industry free carbon allowances that overlap with a CBAM, it will violate WTO rules because this is clearly a protectionist measure.
Should exports be covered? EU Industries have been lobbying for export rebates to maintain competitiveness, by getting carbon costs back when they export a good.&nbsp; The problem with this is that it might be <a href="https://www.europarl.europa.eu/cmsdata/210514/EXPO_BRI(2020)603502_EN.pdf">illegal under international trade law</a> &ndash; not to mention, it could lead to EU companies just exporting the most carbon-intensive products.
One thing that has not yet been determined is where CBAM revenues will go, and whether they will flow into the EU budget. Choices about who gets money within the EU are inherently political: for example, whether funds should go directly to hard-to-decarbonize industries or to an innovation fund, which kinds of technologies should be funded, etc. This becomes even more complicated if the EU is perceived by trading partners as filling its coffers at the borders. Additionally, there still are no exemptions for poorer countries. On the other hand, heads of European government have suggested that trade partners can avoid being subject to CBAM by increasing their climate ambition. German Chancellor Scholtz has promoted the idea of &lsquo;climate clubs&rsquo;, where countries with more ambitious strategies would be exempt from the tariff. He has pushed this agenda at the <a href="https://www.euractiv.com/section/energy-environment/news/germanys-scholz-rallies-g7-countries-behind-climate-club-idea/">recent G7 meetings</a> as well as at the <a href="https://www.euractiv.com/section/energy-environment/news/scholzs-master-plan-for-africa-to-bypass-the-eus-co2-tariff/">EU-African Union summit</a>. What this neglects to take into account is that not all countries have the same resources and capacities when it comes to adjusting their climate strategies.
<h3>How CBAM affects the rest of the world</h3>
Research looking at potential impacts of CBAM on other countries remains limited. But <a href="https://publications.iass-potsdam.de/rest/items/item_6001199_7/component/file_6001200/content">our research shows that there may be risks for smaller countries</a>, both in eastern Europe and the Global South. Certain countries rely heavily on trade with the EU for their GDP &ndash; even if they are a smaller and less important partner from the EU&rsquo;s side than for example the US or China.
But it&rsquo;s not only exposure to a CBAM that matters. We argue vulnerability is even more important, because not all countries could adapt to a CBAM in the same way. For example, the US could adapt to a CBAM by diversifying its exports, implementing a carbon price, and helping its producers lower and track emissions. Other countries might not have these strategies available to them: in Eastern Europe, producers are not going to be able to change the very intense trade dependence on the EU, and they already have very high emissions because they&rsquo;re locked into coal-fired power. Other countries like Mozambique have much lower emissions, but lack the institutions to monitor and verify emissions &ndash; so they might nevertheless have to pay fees at the border. Overall, we find that there is an unequal distribution of CBAM impacts with most countries facing relatively high risks located in Africa and South-Eastern European countries (e.g. Mozambique, South Africa, Bosnia, Ukraine, Turkey).
Within these countries, another study finds<a href="https://publications.iass-potsdam.de/rest/items/item_6001279_7/component/file_6001289/content"> that</a> the EU CBAM is already starting to influence the climate policy debate. More specifically, a study in Ukraine<a href="applewebdata://D92CB9BB-52E9-4333-8E2D-9ED266036BF7#_ftn1" name="_ftnref1">[1]</a> shows that even before the European Commission published its <a href="https://ec.europa.eu/info/law/better-">draft regulation</a> on the EU CBAM in July 2021, the possibility of a EU CBAM had already started changing the position of carbon-intensive industry and other interest groups and political actors not traditionally interested in climate policy. But this has yet to translate to improving climate policy ambition, perhaps because of the uncertainty around the details of the EU CBAM and limited financial resources for decarbonization.
Results from these studies therefore show that CBAM could have a transformative potential for impacted countries &ndash; but this won&rsquo;t happen automatically. If impacted countries are not able to adjust by increasing their climate policy ambition and tracking their emissions, CBAM would instead limit their trade option without leading to decarbonization. This can create new global inequalities and exacerbate existing ones &ndash; a risk which should be considered both in the final design of the instrument but also in the processes followed going forward.&nbsp;
<h3>Recommendations</h3>
&nbsp;We believe the EU must consider the justice implications of a CBAM and react to mitigate risks for vulnerable countries &ndash; especially given the fact that Europe bears a high degree of historical responsibility for climate change.
A significant part of the revenues generated through the EU CBAM should be used to support decarbonization and strengthen emissions monitoring and verification capacities of low- and middle-income countries. This should also include additional support like technology transfer and capacity building, and use existing initiatives (e.g. take into consideration pre-existing climate finance architecture).
The EU needs to clarify where revenues from the CBAM will go in the lead-up to COP. Although the <a href="https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-EU-Green-Deal-carbon-border-adjustment-mechanism-_en">EU suggested initially</a> that most revenues from the CBAM will contribute to the EU budget, the latest parliament discussion proposed <a href="https://www.oxfam.org/en/press-releases/european-parliament-vote-carbon-border-tariff-step-still-unfair-poorer-countries">increasing climate finance funds</a> for least developed countries (LDCs) though the CBAM revenues. However, it needs to be ensured that this proposal will materialize, and in a way that it will be impactful. This includes guaranteeing a sufficient level of additional and predictable flows as well as transparency, accountability, and country ownership in the way these financial flows are used.
&nbsp;Transferring at least part of the CBAM funds to low-income and middle-income countries will also increase CBAM acceptance internationally. Currently many trading partners perceive CBAM as unjust, viewing it <a href="https://publications.iass-potsdam.de/rest/items/item_6001279_7/component/file_6001289/content">as a form of trade protectionism</a> rather than an instrument to achieve climate objectives. Altering this perception will be important for compliance and international cooperation to fight climate change.
Not only does the EU need to think carefully about revenue allocation &ndash; it also needs to consult with stakeholders outside the EU about CBAM design. International dialogue will also be crucial and must continue and intensify going forward. In addition, stakeholders from vulnerable low-income and middle-income countries will need to be involved in CBAM design. &nbsp;This in turn will help guarantee that the EU accounts for vulnerable trade partners (not just the US and China), and CBAM is not considered a protectionist measure. Making CBAM effective and just depends on setting clear and predictable policy now.
<hr>
<a href="applewebdata://D92CB9BB-52E9-4333-8E2D-9ED266036BF7#_ftnref1" name="_ftn1">[1]</a> This study does not take into account recent developments in Ukraine as it took place before the ongoing war. However, we believe that results may still hold relevance for other trade partners.

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