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European Green Deal: Putting words into action

On the occasion of the recent World Economic Forum in Davos, Ursula von der Leyen showcased the Green Deal announced last month by the European Commission, stating that it constituted the European Union’s “new growth strategy”. The Green Deal is presented as a series of measures aimed at Europe becoming the first climate-neutral continent by 2050.

These measures rest upon two main pillars:

(i) An investment plan to fund the European Union’s climate and environmental objectives, mobilising €1,000bn over the next decade. Drawing on the EU Taxonomy, investments are to be channelled in particular into green energies, the circular economy, building renovation, etc.

(ii) The implementation of a “just transition mechanism” to provide at least €100bn of targeted support to countries exposed to steep decarbonisation costs on account of their dependence on fossil energy, notably coal.

Key to all this, and in order to preserve the competitiveness of European producers facing competition from countries with lower environmental standards, Ursula von der Leyen mentioned the introduction of a Carbon Border Adjustment Mechanism (CBAM). The objective is to ensure that third party countries comply with the highest environmental standards. However, the European Commission won’t reveal its approach until late 2020 or early 2021, after it has completed a detailed feasibility analysis, as recently underlined by Phil Hogan, the EU’s Trade Commissioner.

There are still a number of moot issues. They include, amongst other things, the methodologies for determining the carbon footprint of products imported into the European Union and, especially, quite how the CBAM would be implemented to ensure it is compatible with WTO rules. This last point is crucial: under the European market for carbon emission quotas (i.e. the European Trading Scheme - ETS) such as it functions currently, sectors at risk of relocation in the event of higher carbon constraints (notably the steel, aluminium and cement sectors) continue to benefit from substantial free EU Allowances (EUAs) further to the so-called carbon leakage principle. Under these conditions, implementation of the CBAM would amount to the introduction of an import carbon tax, hence would require the European Commission to end the system of free EUAs. As matters stand, and as indicated in our recent publication (see “Overview of EU ETS – January 2020”), the European Commission’s loftier ambition on the climate front can be expected to bring upward pressure to bear on EUA prices in 2020.