CBAM: The Path to Sustainable Trade or the Trap of Green Colonialism?

As part of REVOLVE’s in-depth coverage of CBAM, Suzan Naz Uzel from REVOLVE spoke to Sam Williams, EU Policy Manager for Energy and Climate at EPICO KlimaInnovation about the challenges related to third countries and the promotion of sustainable low-carbon energy sources inherent in the European Union’s Carbon Border Adjustment Mechanism (CBAM).  

The overarching goal of the CBAM is that of addressing carbon leakage, preserving EU competitiveness while ensuring the EU’s green transition, indirectly seeking to reduce the carbon footprint of third countries’ industrial sectors.

However, if we look at the CBAM from a climate justice perspective, there are some indications that it might have not been designed in a fair and equitable manner, particularly when considering third countries’ vulnerability to climate-adverse impacts and their historical responsibility for climate change.

The CBAM serves as a poignant reminder that a unilateral one-size-fits-all approach might not effectively address the diverse needs and circumstances of countries worldwide. The CBAM alone cannot reduce global emissions in a climate-just manner.

Measuring countries’ exposure to the CBAM, such as through exports of goods to the EU, diversification of trade, intensity of territorial emissions (MtCO2), and production of goods included in the CBAM, like steel, we find on the top of the list many countries that are more vulnerable to, and less responsible for climate change. These countries tend to be less able to invest in renewable energy, have a larger share of rural populations, and have a lower GDP and CO2 emissions profile per capita.

Developing economies that would be particularly hit include African trading partners and the Arab states of the Persian Gulf. The lower-income economies that would feel a higher impact would be countries that export fuel, such as Cameroon, Egypt, and Nigeria, and other African states, such as the DRC, Ghana, and Morocco. Mozambique is often taken as an emblematic case, as it covers over 7% of the EU’s total aluminum imports, with controversy over ‘green’ production.

It should also be considered that there are “Souths in Norths and Norths in Souths”; some sections of the population in a historically highly polluting country may also be amongst those most damaged by emissions or by policies that attempt to mitigate the adverse effects of climate change.

The CBAM serves as a poignant reminder that a unilateral one-size-fits-all approach might not effectively address the diverse needs and circumstances of countries worldwide.

Hence, an advocate for climate justice would question whether these countries should be directly paying through the reduced competitiveness of their industry, hampering their development and economic growth.

While some overarching strategies can support third countries’ development of renewable energy sources (RES), it would be wrong to assume that a ‘one size fits all’ strategy can address the promotion of low-carbon energy sources in third countries.

I see at least three obstacles.

1. The first is the risk of falling into the trap of ‘green colonialism’, developing RES in third countries with the sole purpose of importing these to the EU. Hydrogen’s spotlight is an interesting case study, as REPowerEU’s target of 10Mt of hydrogen to be imported by 2030 may incentivize the exploitation of freshwater resources in third countries, where there is a potential risk of water poverty, with the aim of importing green hydrogen to the EU.
2. The second hurdle is the price competitiveness of fossil fuels such as natural gas compared to the higher prices of the development of infrastructure for RES. The Russian war on Ukraine could be an opportunity to trust price signals and invest in renewables. Subsidies for fossil fuels should be phased out. Cooperating with third countries in greening their industry would, in turn, clean Europe’s supply chains.
3. Finally, I would refer to the risk of developing too much of an EU-centric strategy. This would ignore country-specific issues, such as single variables affecting the vulnerability to, and responsibility for climate change. Multi-country coalitions seeking common rules too often fail to consider this. It comes as no surprise that only the 2022 Sharm El Sheikh COP27 started a conversation about providing financial assistance to nations most vulnerable to and impacted by the effects of climate change.

Another example is the climate club. EU advocates for climate clubs too often envision a common carbon-pricing area, whereas the exclusionary character of ‘clubs’ and the focus on carbon pricing cannot be an effective and all-encompassing solution for all countries. In November 2022, EPICO published a paper discussing better, more inclusive options for designing climate clubs.

Nonetheless, some positive practices can be observed, and here I refer particularly to the increase of Trade and Sustainable Development (TSD) chapters in free trade agreements. Another example is the increased number of memorandums of understanding (MoUs) on common hydrogen strategies with third countries.

The agreement with Namibia sees the supply of four-fold the amount of RES-produced electricity required to produce the hydrogen that the EU intends to import. The trade agreement with Chile works on the harmonization of certification schemes for renewable fuels, addressing trade barriers for hydrogen, and promoting hydrogen production. [See more on the Chile-Team Europe Green Hydrogen Platform, June 2023.] These are two effective precedents that can inform, without providing a blueprint for, cooperation with third countries on RES development.

On 13 February 2023, EPICO published a complete policy report on design options for the European Hydrogen Bank to support the hydrogen production and import targets. Domestically, the EU is setting up an effective auction mechanism to provide premiums at the supply level. On the international level, the issue will be more challenging. Beyond the need to support electrolytic hydrogen production in third countries, default guarantees would be a way to hedge against risks related to potential default events in take-or-pay contracts for hydrogen or its derivatives that are outside the control of the hydrogen producers.

A more nuanced design of the CBAM, taking into consideration third countries’ responsibility and vulnerability, would have perhaps helped to ensure a fairer and more equitable implementation.

Ultimately, we need to cover the gap between the high costs for first movers, and the low willingness to pay for demand-side. This requires an increased role for public and private partnerships.

A more nuanced design of the CBAM, taking into consideration third countries’ responsibility and vulnerability, would have perhaps helped to ensure a fairer and more equitable implementation.

The European Hydrogen Bank can provide a useful example for a public-private partnership, at least at the domestic level. The terms and conditions of the pilot auctions for premiums under the innovation fund somewhat address this issue through their design. The issue of designing a sustainable H2 industry, as well as ensuring the strategic role of the relatively low available resources, can see solutions in financial support prioritizing H2 producers supplying hard-to-abate sectors, such as steel, petrochemicals, aluminum, cement, and fertilizers. In turn, this could incentivize Member States to increase the budget for green hydrogen production.

In turn, this allows the market to develop the key infrastructure required to support the uptake of green hydrogen.

Since the CBAM is calibrated to the phase-out of free allocations under the Emissions Trading System (ETS), an effective future step would be that of ensuring such a phase-out by 2034 at the very latest. I foresee that a more complete understanding of the effects of the CBAM will be seen a year after its full implementation, starting from 2027.

To help address social impacts of carbon pricing, a Social Climate Fund is being established in parallel. Its funding, however, is not sufficient to shield EU policy-makers from potential future political backlash, especially from third countries.

The CBAM alone cannot reduce global emissions in a climate-just manner.

Cooperation with third countries impacted by the CBAM should also entail support in monitoring and calculating both direct and indirect emissions of covered goods. The latter category, the embedded carbon footprint of exported goods, although not yet included in the scope of the CBAM, can help to implement a better design of the carbon levy in the future.

An expansion of the scope of the CBAM covering more goods and sectors, such as international shipping and aviation, can be an expected next step from 2030 onwards.

However, it may not be all roses and dandelions. As it stands, we can expect a revision on CBAM in 2026. Given the political composition of the next European Parliament (from 2024), there is a realistic chance that the roadmap gets reverted at some point, considering the viewpoint of the potential next EU legislature.

In the future, the hydrogen market will become a large commodity, using Guarantees of Origin as certificates. The import targets are indeed rather high, and the high cost of electricity, needed to produce electrolytic hydrogen, may incentivize the EU industry to relocate to regions where hydrogen is cheaper.

We can expect the CBAM to play a key role here, although missing its aim of combatting carbon leakage by equalizing the cost of carbon between imported and EU-produced products, rather than a tool to address the volatility of steep energy prices in the EU. The latter aim should not be confused with the former. This should be addressed through other tools, prioritizing demand reduction, and energy efficiency, phasing out subsidies for fossil fuels, and incentivizing investment in renewable energy sources.