European industry that has to pay for its carbon emissions under the EU Emissions Trading Scheme (EU ETS-EU) is penalised when faced with international competitors that are not subject to the same constraint. An adjustment measure (the introduction of a Carbon Border Adjustment Mechanism, CBAM) would help to restore fair competition. However, the issue is politically sensitive in the international arena, in trade and environmental negotiations, where the EU is exposed to the double criticism of protectionism and unilateral action. The political reception will depend on the narratives that the EU and its Member States are able to impose on their partners, and on their ability to listen (and influence design compromises) in order to avoid a sense of 'fait accompli'. The issue at stake goes beyond carbon adjustment alone to encompass the EU's entire trade policy, its development policy and its role in the Paris Climate Agreement.
It is therefore a priority to engage in a more open dialogue with non-EU partners, focusing on four themes:
- Understanding and responding to the vulnerability of Europe’s trading partners, distinguishing between the real vulnerability of some Least Developed Countries (LDCs) in particular, and the political risk of an argument being used as a rallying cry.
- Scope of the adjustment mechanism: in relation to the previous point, short and medium-term objectives must be clarified, bearing in mind that the EU’s internal promises, if poorly managed, can undermine diplomatic efforts.
- Potential attractiveness of an adjustment mechanism for partners that develop domestic carbon pricing: here the priority should be given to bilateral trade in the first instance, particularly with the United States and China; and at the same time the EU could be clearer in its advocacy of such an approach in international fora.
- The broader perspective from which countries or regions perceive the proposed adjustment mechanism.