With the Fit for 55 package, the European Union aims to reduce its carbon emissions by 55 percent compared to 1990 levels by 2030. An essential part of this strategy is the so-called Carbon Border Adjustment Mechanism (CBAM), an extension of the existing Emissions Trading System (ETS). By applying the same rules and levies both to inner-European production and to foreign imports from countries that do not meet the EU’s “climate-friendly” production standards, the CBAM aims to level the playing field between domestic and external producers. Without this mechanism, policy makers are afraid that the EU’s strict environmental rules might lead to “carbon leakage”, i.e., to companies moving their factories abroad, thereby effectively undermining European efforts. The CBAM would require importers of specific goods to register with customs authorities and surrender “CBAM-certificates” that can be purchased from climate authorities in EU member states.
In July, the Commission adopted a proposal on the CBAM. In light of the upcoming legislation in the European Parliament, VoteWatch has reached out to Mohammed Chahim (S&D). The Dutch MEP will act as the rapporteur for the procedure and has shared some of his thoughts on the CBAM with VoteWatch.
VoteWatch Europe: Mr. Chahim, you were among the leading MEPs with regards to the proposal on the Carbon Border Adjustment Mechanism (CBAM) that the Parliament supported back in March 2021. In comparison to the earlier EP resolution, what are your views on the proposal that the Commission has issued this summer?
Mohammed Chahim: Yes, I was one of the shadows for the initial report, but I also think it is important to understand that this is a new piece of legislation. We really do not want it to backfire. I am therefore not surprised that the Commission is taking its time.
As I see it, the Commission’s report is a starting point. Now it is up to the co-legislators to give their opinion and to decide what the final version will be. I will initiate this phase now as a rapporteur for the Parliament and the Council will probably follow during the French presidency. We will see where we can maybe make amendments to the report and which direction these amendments will take. And I really want to take my time for that: I want to talk not only with the other political groups, but also with our partners outside of politics: With NGOs, industry representatives, but also trade partners outside of the EU. Because I really believe that this can be a strong instrument – if we introduce it in an almost perfect manner.
The big problem I see is that we do not have time for “teething troubles” as we saw them with the ETS since there will be pressure on us not only from inside, but also from outside the EU. Looking at all the different interests and the preferences of the different industries, you will never satisfy everyone. For me, this is very exciting because I like complexities, but let’s see how my first draft will look like, I cannot go into much detail there yet. I want to take my time.
VoteWatch Europe: The CBAM’s main goal is to prevent carbon leakage. However, industry representatives have voiced concerns over the CBAM (at least initially) only applying to raw materials, but not to finished products. Could this ultimately lead to European producers moving the parts that are further down in the production chain abroad?
Mohammed Chahim: Scientifically, there is no proof of carbon leakage. I rather see the CBAM as an instrument to make sure that there is an equal playing field for producers inside and outside of the EU. And of course, if there was any reason to move production outside of the EU, we would make sure that those companies are treated the same way as when they were producing inside the EU.
I am a socialist, so I would prefer companies to stay in the EU to create jobs – and I also believe that those companies that are leading in terms of carbon-sustainable production will ultimately be the best performing ones from a competition point of view as well. They will be, at the end, the winners of the transition.
Secondly, I agree it does not make sense if we have a carbon adjustment mechanism for steel imported from outside the EU, but do not have the same for cars. That would indeed be a main driver for cars to be produced outside the EU. I think the mechanism should be applied throughout the value chain, if we look at the average carbon footprint of a product – whether it’s half-finished, whether it’s raw material or a finished product. We do not want to have an effect like after the Kyoto protocol where many of the “dirty” industries were moving away. That would not be a fair instrument and it is something that we should look at in the pilot phase.
I used to be a scientist in the field of energy transition. And one of the last things I developed for the European Commission was a model looking at consumption-based emissions. If you look at the finished product, you will see all the different elements and parts have entered the EU, were processed, then left the EU again just to enter again at a later stage and so forth. Allocating the consumption-based emissions in this process is very complex. That’s why I understand that the Commission wants to start with raw materials. We must understand which technology can be used in order to make sure that a fair carbon price is paid.
I think during the three-year pilot phase, we will collect a lot of data to understand the effects of the mechanism. And I think we should use that data to prepare a final version, or we should create conditions within the report stating that, when we see these types of observations during the pilot phase, then this is the way forward. It will have to be a very complex mechanism. It is possible, but it really depends on the technical implementation.
VoteWatch Europe: Industry representatives are concerned that administrative burdens placed on the importing companies will be too high…
Mohammed Chahim: We live in the 21st century. We live in a world of artificial intelligence and big data and decentralised data storage and blockchain. So I think that, if needed, the technological solutions will be on the table. But it won’t be easy, developing the necessary infrastructure will be very complex, especially from a global perspective.
Nevertheless, I refuse to say “no, it’s too difficult” before we have even started. In the end, we want to make sure that the whole “Fit-for-55” package serves to achieve two things: we need to reach our targets for 2030 and 2050, but at the same time, we need to make sure that the transition is done in a fair and balanced way. Those are the conditions from my perspective as a Social Democrat, but I think they are supported by most political groups. And all the different packages will have to contribute to that.
We have to have a vision, but at the same time, we have to be a bit pragmatic when it comes to implementing all the measures, because if they don’t work, they’re not effective. Again: this is the only actually new mechanism within the whole package, the others are just adjusting existing directives or legislations.
VoteWatch Europe: Others fear that the CBAM will lead to an increase in prices for European consumers. Do you share these concerns?
Mohammed Chahim: If you look at the ETS and at effort sharing, you will see that the system already exists in the EU. The only new thing that we will do is to make sure that, when we import products, the same conditions are applied to them. That’s the only difference. And of course, parts of the cost will be passed on to the consumers. But I also think that it will incentivise producers to improve their production methods to become more sustainable. At the same time, if I look at the whole European Green Deal, we have a strong base with the climate law. We don’t make laws to break them, that would be silly.
Next to strategy and investment, pricing mechanims, taxing mechanisms and product requirements are the third big pillar of the Fit for 55 package. So, on the one hand, we support companies by creating funds and cheap loans, by creating Carbon Contracts for Differences etc. And then, of course, we also need price effects. We need to make sure that there is a fair price on carbon. If we only charge the consumers through taxes, then the producers will have no reason to change. Just look at the reality today: consumers are paying very high carbon prices when compared to the industry. There are yearly updated OECD reports to show that.
For example, Dutch consumers are, all indirect and direct taxes taken together, paying approximately 200 euro per ton CO2. Regardless of whether you consume or not, regardless of whether you are polluting or not – because a big share of this is fixed taxes and tariffs. I want to make sure that this becomes more balanced again, that the polluter pays principle is on the table. That we incentivize the production, but also the consumption of sustainable products.
And of course, if there’s a significant price effect, we need to make sure that we compensate low- and middle-income households. You’re talking to a Social Democrat – this is the core of our party. I don’t want to implement things and say to people: “just buy an electric”. That’s not the reality, it ignores the fact that initial costs are way too high. So, we are also working on that within the Fit for 55 package: making sure that alternatives for fossil fuels – be it for heating for electricity, for driving or transport – will become the most affordable alternatives.
VoteWatch Europe: While the EP own-initiative report was titled “Towards a WTO-compatible EU carbon border adjustment mechanism”, some of the EU’s international partners are concerned that the CBAM would not comply with WTO rules or they even criticise the measure as potentially protectionist or discriminatory. How do you respond to such criticism?
Mohammed Chahim: There is no protectionism, absolutely not. I think we would like to have zero revenue with this mechanism. This is one of the few instruments we have in place to make sure that other countries follow the very ambitious plans that we have in the EU. And the laws for this are on the table. This is not a vision anymore; it will become reality. And there will be consequences if we are not in line with the targets that we have set, because we have defined them in law. And of course, the first reaction of our partners will be that it is probably not WTO compatible etc., but we also have our lawyers and legal staff, we have looked at all the different aspects of the WTO and it is compatible.
This is not about creating a trade war. This is not about making sure that products of small island states or low-income countries are not allowed to enter the EU. Of course, also from an economic development perspective, we need to make sure that the CBAM is implemented in a fair way there. All we are saying is that we will start taxing outside producers in almost exactly the same matter as we do EU producers. That’s not a protectionist mechanism.
VoteWatch Europe: Shortly after the Commission issued its proposal, the United States Senate announced plans to introduce a “polluter import fee” similar to the CBAM. Do you think the measure will incentivise other nations to raise their climate ambitions in the future?
Mohammed Chahim: The United States want to have carbon-free imports – I think that goes even a bit further than the CBAM. It means that you do not necessarily want to tax carbon, but that you want to make sure that the carbon does not enter the country. So they will probably have product requirements. They will probably say: if steel is produced using a more carbon-intense method than in the US, then we don’t want that steel.
Generally, I think the COP26 in Glasgow will be very interesting in this regard, because I do believe that this will be one of the bullet points that will be discussed. We do not only need to increase the nationally determined contributions, but I think it is essential that we also increase our ambitions to fill the gap of Paris.
We have to understand that polluting cannot be without any cost and that it should not matter where you produce. That’s why I really like the concept of consumption-based-emissions. If you look at Chinese pollution, for instance, you could say that China is a very pollutive country. But if you see who consumes those products, then those consumers should understand that they are contributing to the pollution of those nations. So let’s make sure that we start putting a price on the consumption of pollution. Because in theory, it is very simple to become climate-neutral: You just make sure you don’t produce anything and import everything. This is of course not very realistic, but it is not the way we should look at climate change. Instead, we need to look at it from a global perspective: It’s a collective problem and collective problems need collective solutions. And all the mechanisms that are on the table are driven by the fact that we have a climate law and we want to be climate neutral.
We are looking further than our borders when it comes to our responsibility. We want to be a partner for other nations. We want to inspire them and be inspired by them. It’s not a Cold War, it’s not about North versus South. We’ve seen the past summer, the extreme weather events, the floods, the droughts, the forest fires. This is reality. And we also see the increase of energy prices. The costs of doing nothing will increase year after year. Let’s not ignore these very serious costs, let’s act. This is what we are doing now as Europeans. And we hope that other nations will not only talk about pledges, but that they will follow up on it, with the right directives and legislations.
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