CBAM developments - a commercial win for industry or a WTO breach in the making?

The European Parliament has this month rejected proposals to phase out free carbon emission allowances for those industries already covered by the EU’s existing emissions trading system (EU ETS), even as the EU moves closer to the introduction of a new carbon levy at its border.

You might have heard the term "carbon leakage" in relation to these discussions. Essentially this is the risk that companies facing high costs to comply with stringent emissions regulations or ambitious net zero plans may choose to relocate oversees. Why? To operate in regions with less climate change regulation and reduced shareholder pressure to implement such plans, while continuing to sell their products into a global market place.

Among the most impacted businesses are heavy industrials including cement and steel producers. Any policies around carbon leakage will have a critical impact on the ability of such companies to implement their climate strategies commercially while continuing to compete globally.

This makes this month's developments in the European Parliament quite significant.

Firstly, the European Parliament voted strongly in favour of the creation of a new "carbon border adjustment mechanism" or "CBAM" on carbon intensive imports. Secondly, and perhaps more interestingly, they also voted narrowly against scrapping existing free allowances (under the EU ETS) once any new CBAM comes into play.

This will be a hugely welcome development for heavy industry companies with significant production sites in the EU, who have been advocating to continue to receive free allowances at the same time as any new CBAM is being introduced. There is a strong desire in the industry to maintain the existing measures "at least as long as the new mechanism is in a testing phase and has not yet proven its effectiveness" according to BusinessEurope.

However, none of this is final, and further challenges lie ahead. The EU CBAM proposal is not expected until June. Critics argue this breaches World Trade Organization (WTO) rules by creating double protection for EU industrial companies. And the conversation doesn't stop in Europe: there has also been noise about the US, possibly, exploring a similar mechanism.