Why CBAM is detrimental to European Competitiveness

In the context of the series of short digital interviews launched by APPLiA, the twelfth episode features Mr Paolo Falcioni, APPLiA’s Director General, on why CBAM, in its current format, is detrimental to European competitiveness. All, in a new engaging format.

• What is the economic logic behind the CBAM proposal?

To earn an understanding of the true scale of how CBAM will be detrimental to European competitiveness, we must first dissect the economic consequences of the proposal. In theory, CBAM was established to help reduce carbon emissions and prevent the risk of carbon leakage, establishing a level playing field for EU raw material producers versus their non-EU counterparts. In reality, CBAM aims to make up for the higher manufacturing costs in the EU caused by the reduction of ETS free allowances. “Achieving this would involve making equally more expensive carbon intensive raw materials coming into the EU, including iron and steel, cement, aluminium, fertilisers and electricity,” began Mr Falcioni. 

• What would be its implications on the EU Industrial Strategy?

As it stands, CBAM risks jeopardising the objectives laid out by the EU Industrial Strategy which aim to make EU industry more competitive globally, and enhance Europe’s open strategic autonomy. “The revision of the ETS free allowances, combined with the CBAM proposal, will increase production costs for all manufacturing companies in the EU relying on certain materials to produce their products, including the home appliance industry” highlighted Mr Falcioni. That is to say manufacturing companies based in third countries will get a competitive advantage over similar products produced in the EU, as the CBAM will only apply to raw materials, not on finished goods. In this scenario, products that are manufactured abroad and imported into the EU will be more competitive than EU-made ones on the home market of many European companies, translating into a competitive disadvantage for manufacturing in Europe. “This would generate an incentive for manufacturers to move their factories outside of Europe with the potential loss of millions of European jobs,” explained Falcioni.  

• To what extent will the home appliance industry be impacted by the Mechanism? 

As a whole, the home appliance industry supports the Mechanism as a part of a broad and comprehensive package of measures needed to be implemented to tackle the growing problem of climate change. However, Falcioni stressed how “the proposed CBAM risks enabling a depressive industrial strategy that jeopardises the European economy and the environment,” as a whole. Let’s take the case of a washing machine manufactured in Europe. Production requires on average 25kg of steel, 4kg of cement and 3kg of aluminium, materials that will all be subject to CBAM. Under the current ETS, CO2 price amounts to €90/ton CO2. “This means EU-based manufacturers will face a 5-10% increase in the cost of raw materials to produce one washing machine,” Mr Falcioni detailed. Ultimately, if other regions of the world do not set up a similar mechanism, manufacturing in Europe would be at a global disadvantage. 

• Is the proposed CBAM environmentally sound?

The removal of the free allowances of ETS in unison with CBAM aims to address climate change by putting a price on CO2 emissions. In this context, it is essential that carbon leakage is halted so that the emissions are not simply relocated and produced elsewhere. Not only does the proposed CBAM incentivise the relocation of factories and drive investments outside the EU, it also simply moves carbon emissions elsewhere. In other words, “for these factories, it would then be better to remain competitive rather than more environmentally friendly,” hinted Falcioni. 

• What solution should be undertaken to address the climate crisis while securing EU competitiveness?

The half-baked Carbon Border Adjustment Mechanism calls for the need to undertake a solution that squares the circle of  sustainability whilst securing EU competitiveness. In these circumstances, Falcioni stressed the need to “give certainty to investors that manufacturing in the EU will be equally competitive than manufacturing outside of the EU.”  For this reason, “the European Commission should present a comprehensive legislative proposal ahead of the removal of ETS free allowances, to preserve the competitiveness of all European industries, preserve EU jobs and show EU global sustainability leadership while also satisfying WTO trade requirements,” he stated.

Overall, as currently proposed, the new emission cap would foresee a large-scale shift of production and investments outside of Europe, in turn, generating significant knock on effects for the environment. For this reason, an all-encompassing approach shall be undertaken. “Now, it is time to act to safeguard the future of Europe,” concluded Mr Falcioni.

This and much more in APPLiA’s twelfth digital interview, available at this link.