EU CBAM and the future of investment through Asia

Digital event with GC experts Stephen Adams, Senior Director, and Marissa Lee, Associate Director, examining the EU's Carbon Border Adjustment Mechanism and what it means for investment in Asia.

To summarise how Global Counsel thinks about EU CBAM, we have shared a series of soundbites from the webinar, as below:

• The very fact that EU CBAM survived the journey to implementation is notable, and representative of how the debate on the importance of internalising carbon costs in trade has evolved a long way over the last decade.
• Global trade is increasingly carbon-constrained, and globally-competitive industry requires access to low-cost, low-carbon energy. 
• This makes Asia an increasingly attractive investment destination. Large economies like China and India are leaders in terms of low-cost renewable energy. But Asia is also a diverse grouping of countries where there are specific opportunities to be found, depending on the nature of your business.
• On CBAM’s WTO compliance: The EU has deliberately designed CBAM to be defensible under current WTO law. This is the reason why the CBAM is linked umbilically to the EU ETS – in order to ensure an element of national treatment.
• On CBAM scope expansion: This is inherently linked to the WTO compliance question. The scope of the CBAM is going to be linked to the expansion of the ETS. The reason why the EU has chosen to link the CBAM to the ETS is in order to ensure that it can point to a domestic cost being imposed on a manufacturer that is mirrored in the CBAM’s levy for an import, which is important to demonstrate national treatment.
• On how CBAM integrates with carbon pricing policy elsewhere: CBAM is designed around the core idea that a levy should be paid on the embedded carbon content of a good - and that is the only way to make a plausible argument that a CBAM is compliant with WTO law’s requirement for non-discriminatory treatment between individual trading partners. The problem is that trading partners are going to be potentially very diverse in the way that they require firms to internalise the cost of carbon. And therefore you need a system that doesn’t really focus on the tool, but focuses on the outcome. And that’s what the CBAM tries to do. Essentially, CBAM requires an importer to demonstrate the embedded carbon content of an import. It doesn’t matter how in particular you got to that embedded carbon content, what matters is that you can credibly demonstrate what it is.  
• On whether export rebates are openly considered in the CBAM regulation: Yes and no. Article 30.5 creates a two-yearly review after the end of the transition period, which will include an assessment by the Commission of the competitive impact on exporters and a mandate for the Commission to come forward with ideas for addressing such a perceived or measurable disadvantage. That’s not an explicit reference to export rebates, but the reference to the relative competitiveness of exports is a recognition of the problem.
• On international responses to CBAM: To say that CBAM has spurred more countries to consider carbon pricing is to overstate the case. For many countries, this is not solely about making sure that you are able to access the EU market. The Brussels effect is that Brussels has been the first major jurisdiction to have taken this step towards designing a system for internalising carbon costs, while also thinking about the international dimension of doing that. Brussels has just provided a model for others to follow.
• On how GDPR is analogous to CBAM: As a precedent, we can look at the proliferation of data privacy frameworks in the early 2000s. That came with the proliferation of localisation requirements for personal data. And that’s because the two are intrinsically linked. If you are going to raise domestic standards for data privacy, then you are almost by definition going to have to answer the question of: What if the offshoring of personal data can essentially be used as a backdoor for avoiding data protection requirements?
• On how a potential move to the right in European politics might affect CBAM: Bear in mind, an ETS is already in place - once you have an ETS functioning in this way, the political demand for some kind of border adjustment mechanism is almost inevitable.  A shift in the European Parliament is unlikely to alter the CBAM as it is currently conceived. What it may slightly change is the debate around trying to extend the ETS scope beyond what is currently planned. But the much bigger variable is the external reaction, and the extent to which others try to change EU policy from the outside through the mechanism of retaliation.