The Carbon Border Adjustment Mechanism (CBAM) is a heavily debated legislative proposal for a carbon tax on EU imports from five key sectors (aluminium, cement, fertilizer, iron and steel, and electricity). [1],[2] It has been proposed as part of the Fit for 55 package, with the purpose of preventing carbon leakage (the relocation of carbon-intensive production of tradable goods away from the EU, to avoid carbon costs).
Currently, the risk of carbon leakage is addressed by the EU Emissions Trading System (EU ETS) free allocation mechanism, which gives free emissions allowances to installations at risk of relocation because of the carbon price in the EU. This mechanism has been proposed to be phased out and replaced with CBAM, thus allowing for a stronger decarbonization incentive as these installations would start purchasing their carbon allowances.
Besides representing a tool for avoiding carbon leakage, the CBAM is certain to generate economic and climate effects:[3] a small but positive impact on economic activity and employment in the CBAM, a reduction by 13.8% in emissions of the EU ETS covered sectors by 2030[4], and a small but positive emissions reduction outside the EU. Nonetheless, economic and emissions effects will vary by country and sector. In general, EU producers of refined downstream products that use CBAM feedstock will face carbon costs that non-EU competitors will not. This is particularly relevant for exports, as EU producers facing higher carbon costs are likely to suffer from a loss of competitiveness in foreign markets. To counter that effect, strong investments in clean technology, partly by using state aid, can help the CBAM sectors decarbonize and thus gain a sustainable competitive advantage.
In Romania, the CBAM may have significant impacts, with around a third of imports of CBAM goods coming from countries not covered by the EU ETS. This could lead to an increase in input costs for domestic manufacturing sectors but also to a loss of competitiveness in exports. For certain CBAM goods (particularly iron, steel, and aluminium) exports to non-EU countries are significant,[5] while Romania’s share of CBAM goods in total exports is the highest in the EU. However, the country is expected to receive significant decarbonization funding through EU financial mechanisms. Therefore, Romania should support the implementation of the CBAM while ensuring that revenues from its implementation and from the revised EU ETS are appropriately directed towards low-income Member States. An expansion in size and scope of the Modernisation Fund could be a solution for this, benefiting from an already functioning governance process.
If managed correctly, the introduction of the CBAM could consolidate Romania’s profile as a cost-competitive intra-EU investment destination, including for CBAM goods and their downstream sectors. For this, it is paramount to ensure that the proceeds from the elimination of free allocation also flow to low-income Member States, likely the most affected by the introduction of a CBAM.
To enable the full positive effect of the CBAM for Romania and mitigate any negative effects in a timely and effective manner, we recommend the following:
- maintaining a trial period preceding phase-in, to avoid unintended consequences;
- using state aid to mitigate potential negative impacts particularly on exports, but in a way that avoids rebates;
- funding the decarbonisation of industrial production in Central and Eastern Europe using revenues from the current free allocation, either as an extension of the Modernisation Fund or as a separate instrument;
- avoiding singling out the cement sector, which in Romania is more trade-exposed; and
- ensuring that the phase-in of the CBAM mirrors the phase-out of free emissions allowances.
[1] European Commission (2021) Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism
[2] More information on the EU Green Deal and the Fit for 55 package can be found here.
[3] European Commission (2021) – Impact Assessment Report Accompanying the document Proposal for a regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism, SWD(2021)643
[4] Compared to a baseline with just the current ETS, which is likely to become more ambitious with the Fit for 55 package. Therefore, the CBAM itself may have a lower impact.
[5] Based on Eurostat trade data for exports of iron, steel and aluminum and articles thereof.