Sunday read: Digesting Europe’s border tax proposal


From pv magazine 08/2021

Solar installations, particularly grid-scale projects, consume large volumes of steel and aluminium in the production process. According to Luxembourg-based ArcelorMittal, one of the largest steel manufacturers in the world, each new megawatt of solar requires between 35 and 45 tonnes of steel, and each new installed megawatt of wind power requires 120 to 180 tonnes. Battery storage applications, electric vehicles, electricity grids and, in the future, electrolysers for green hydrogen also require metals and raw materials in their production process.

At present, European metals producers are largely shielded from carbon costs because they are granted free EU carbon allowances under the EU’s Emissions Trading System (EU ETS). In some cases, this can cover 100% of their CO2 emissions, depending on their efficiency performance. This is to avoid carbon leakage and the risk of energy-intensive industries in Europe relocating to other jurisdictions with less costly penalties on pollution.

However, the free allocation of allowances to metals producers could be gradually phased out, starting in 2026. This is because the EU is planning to implement a so-called Carbon Border Adjustment Mechanism (CBAM) that would effectively impose a tax on imports of energy-intensive goods from non-EU countries. This includes iron, steel and aluminium. With a levy on imports, the risk of carbon leakage is reduced, in theory at least, and there is no longer a justification for granting free carbon allowances to European industries.

The European Commission tabled a proposal for the CBAM in mid-July. Although still very much on the drawing board, with many details missing, the proposal has support from a number of EU member states and it could be adopted before 2023, taking full effect from 2026. In a nutshell, the CBAM means that importers of goods such as steel and aluminium would have to purchase certificates corresponding to the price of EU carbon allowances they would have paid if the product had been produced in the European Union. This could add considerable costs; imports would be more expensive because of the tax. Domestically produced steel could also become more costly owing to the gradual reduction in free EU carbon allowances.

The European solar industry has mixed feelings about the CBAM, as it fears higher costs in the supply chain and reduced competitiveness at a global level. Higher PV glass import costs have been a particular concern, but glass was ultimately left out of the EC’s proposal, at least for now. However, a number of members of the European Parliament are now pushing for more sectors, including glass, to be included in the CBAM.

Industry association Glass For Europe said in a statement that it welcomed the EC’s CBAM proposal and its “progressive phase-in and provisions designed to avoid opportunistic trade flows, that will have to be tested before the inclusion of other sectors may be envisaged, including that of the flat glass sector.”

Meanwhile, industry association Wind Europe said it would monitor the developments regarding the CBAM “closely to ensure it avoids undermining its global supply chains of essential materials and components.”

In principle, the CBAM will apply to imports from all non-EU countries unless they participate in the ETS or have a linked arrangement, as is the case with the Swiss carbon market. However, most steel imports in Europe are from Turkey, Russia, Ukraine, and other countries that are not in the ETS. Whether a CBAM will incentivise these countries to lower the carbon footprint in metals production seems doubtful. Moreover, the mining industry in Australia, a big exporter of iron ore, has expressed concern that the CBAM does not reward miners’ efforts to reduce emissions for example by switching to renewable electricity.

At home, the phase-out of free allocation could incentivise metals producers in Europe to invest more in carbon abatement technologies such as hydrogen, in order to curb CO2 emissions and lower their purchase cost of EU allowances. This could potentially lower the carbon footprint in the solar PV supply chain in the longer term.

Logistical nightmare?

How the CBAM system will work in practice is a big unknown. The EC, in its 297-page proposal, admitted that verification and monitoring of emissions associated with imported products will be a challenge.

“The situation gets more complicated the more manufacturing steps are subsequently carried out. It is the nature of manufacturing of more complex products, that the content of the basic materials in the final product will not always be 100%. For example, a product may consist e.g. of 60% steel and 40% other materials,” said the EC’s proposal.

James Whiteside, global head of multi-commodity research at Wood Mackenzie, said in a note that implementation of the CBAM could prove to be a “logistical nightmare.”

“There is little transparency around carbon emissions associated with products. Determining the country of origin of products can also be problematic. Robust certification schemes must be adopted – and adhered to – to effectively administer border taxes,” Whiteside said.

Brussels is also well aware that the CBAM framework needs to be compatible with WTO trade rules. It is hopeful that phasing out free allocation for energy intensive industries at home will be seen as creating a level playing field for overseas exporters.

“The possibility of CBAM breaching WTO rules has been of concern for a while,” Totis Kotsonis, a partner with law firm Pinsent Masons, told pv magazine. “The EU itself has been very much aware of the need to ensure WTO compliance and has been on record as saying that EU legislation will be drafted carefully to ensure that the introduction of CBAM is indeed, consistent with WTO commitments.”

Another pressing question is to what extent the U.K., which is no longer in the EU, will align its policies with the EU by linking the UK ETS to the EU carbon market and introducing its own CBAM.

“I suspect, in due course, given the interest generated by the EU CBAM, the U.K. would have to analyse whether there will be merits in it producing a similar scheme,” said Kotsonis.

Climate package

Aside from the CBAM, the EC’s fit-for-55 package outlined a number of proposals that were welcomed by the solar industry. The revised 2030 renewables target, for example, is a real boost for solar and wind. The new target is for renewables in final energy consumption to reach 40% by 2030, up from a current target of 32%. Industry association Solar Power Europe said the revised target means 660 GW of solar power would be installed by 2030, amounting to 58 GW installed each year. Moreover, the EC says it expects the 40% target to lead to a 14% share of solar power in gross electricity generation by 2030, compared with 34% for wind. Wind and solar had a share of 14% and 5% respectively, in electricity in 2020, according to estimates by EMBER and Agora Energiewende.

Revisions of the framework for guarantees of origin and power purchase agreements were also welcomed by the solar and wind industry. Under the revised EU Renewable Energy Directive (RED ll), all renewable energy producers would be able to receive a guarantee of origin, regardless of whether they have received financial support from national governments.

The EC also outlined further reforms of the ETS, including plans to include the shipping sector, phase out free allocations to aviation, and further tighten the supply of allowances. The European Parliament is expected to begin reviewing the proposals from the end of August.

Author: Andreas Walstad 

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