The European Commission is proposing new trade measures to ensure that local industry is not disadvantaged as parts of the world act at different rates to protect the environment. The aluminium sector will be affected. The EU has devised a ‘carbon border adjustment mechanism’ (CBAM) to tax carbon intensive imports from countries that do not have an emissions trading scheme. Frans Timmermans, deputy head of the Commission, put forward convincing arguments in his speech at COP26 to persuade the world that such a measure is necessary to ensure a level playing field and prevent ‘carbon leakage’. There is also a proposal for a new waste shipment regulation, to ensure that waste can only be exported outside the EU to facilities that have environmental safeguards that are ‘broadly equivalent’ to those in the EU. The waste legislation is designed to stop what could be called ‘environmental leakage’.
These ground-breaking developments will take time to get right. There is little previous experience on which to base a CBAM, apart from a limited carbon taxation system in the US state of California, so it will be phased in gradually. The pilot phase (2023-2025) will require importers to report emissions embedded in their goods without paying a financial adjustment, allowing time for the final system to be put in place in 2026. Aluminium, together with iron and steel, cement, fertiliser, and electricity generation will be included. European Aluminium has successfully lobbied for the CBAM to cover only primary emissions which include carbon dioxide and other greenhouse gases generated during smelting. Secondary emissions, such as those from power generation, are being left out due to the large range of electricity prices in different parts of the world.
The CBAM will require importers registered in the EU to obtain information on carbon emissions of imported products. They can also use the default values provided if actual values are not available. Importers will then need to purchase certificates to cover the embedded emissions. CBAM certificates will track the ETS price, and they will apply only to the proportion of emissions that does not benefit from free allowances under the EU ETS. With these safeguards, the European Commission is confident that WTO rules will not be broken.
While the CBAM is tackling carbon leakage, the waste shipment regulation is concerned with what could be called environmental leakage. EU exporting companies will have to carry out independent audits of facilities which receive their waste exports, to ensure that they are operated to the required environmental standards. This measure will remove some of the incentives for post-consumer aluminium scrap to be shipped out of the EU. Exports are currently one million tonnes. European Aluminium has estimated that 50% of all local demand could be met with recycled aluminium if it were all retained in Europe, which would take the bloc much further to a circular economy. Substituting some primary aluminium with recycled material is also a straightforward way of reducing carbon emissions. What’s more, retained scrap would displace imported primary aluminium with a much higher carbon footprint than the European average, saving additional carbon emissions.
Even if the measures don’t work as expected during the pilot phase, they will be a good start. One problem observed in California is ‘resource shuffling’, which amounts to substitution of high carbon products with domestically available lower carbon ones. Also, corporations may send cleaner products to Europe while the rest of their export production goes to countries with no CBAM. No doubt other problems will emerge and solutions will be developed.
But, despite any problems, an important new precedent will have been set. Exporters and importers will have to document and verify the sustainability characteristics of the products they are trading. Information about environmental safeguards and embedded emissions will, for the first time, routinely be set down in writing. This will improve the traceability of goods as products are most easily controlled when they pass borders. And the information will find its way into the public domain. Consumers will be able to see the carbon intensity of products from different parts of the world. It will then be up to companies to use low carbon and recycled aluminium if they want to stay ahead of the game.
Published: 29 November 21
