CBAM and the idea of the climate club

Last week, Norway announced that it is planning to join the European CBAM. It hopes to avoid future disadvantages when doing business with the European Single Market. This shows that CBAM is a real milestone in global climate protection policy.

Effect of CBAM

The Carbon Border Adjustment Mechanism aims to ensure that goods imported into the EU are subject to the same CO2 pricing as if they had been produced in the EU in the first place. The aim is therefore to achieve equal CO2 pricing.

Steering for other countries

It follows from this idea that a CO2 price already paid in a third country must be taken into account. This is because imports should only be priced in the amount of the difference to the European CO2 price. This creates an incentive for third countries to introduce their own CO2 pricing. In this case, they can keep their tax revenue. Only the remaining difference will then flow to the EU or the member states.

The climate club

If more and more countries introduce their own CO2 pricing, a “level playing field” is created between them again: The goods are subject to a similar or even the same CO2 price. As the competitive disadvantage is reduced, there is gradually no longer any need for a border adjustment between these countries. This will be the case at the latest when the states have fully harmonized their climate protection policies and CO2 pricing. These states will then be able to trade with each other again without restriction and without the need for a separate levy. In turn, countries that do not levy such a charge and are therefore not part of this climate club will continue to be subject to the border adjustment mechanism. Their imports will therefore continue to be subject to CO2 pricing when they enter the climate club.

What does CBAM have to do with this?

Such a climate club, which grants its members the advantage of free trade and charges outstanding members a CO2 price, is favored by Chancellor Olaf Scholz, for example. Countries that want to lead the way in climate protection could join forces in this way and reduce the resulting competitive disadvantages. With the introduction of CBAM, the European Union could be described as the first such climate club.

What are the current developments?

This is also made clear by Norway's recently announced accession. However, other countries besides Norway have already announced that they are stepping up their climate protection measures accordingly. An expansion of this European climate club is therefore conceivable and even quite likely in the medium term. The UK, Australia and Canada are particularly worthy of mention here.

Taiwan is also considering joining the climate club

The latest example in this series is Taiwan. The industry is also calling for and the government is discussing the introduction of its own CBAM. The environment minister there has announced that he will announce details in the middle of next year at the earliest. At the same time, the government in Taiwan has approached the European Commission to check whether the CO2 levy there meets the requirements of CBAM. This is necessary so that it is really deductible and can reduce the cost burden on European importing companies. It is therefore crucial for Taiwan to be allowed to join the European Climate Club.

Support in the administration of CO2 pricing in international trade

If you need help navigating the complex landscape of carbon pricing in international trade, please feel free to contact us directly (helge@kolum.earth). We look forward to working with you! Best regards Helge Wieggrefe