Does the EU ETS harm industrial competitiveness?
Summary
The EU ETS uses policy tools like the Carbon Border Adjustment Mechanism (CBAM) and targeted proceeds redistribution to drive decarbonization while protecting EU industry competitiveness. These mechanisms address carbon leakage and support the transition to sustainable practices, ensuring industries remain competitive internationally amid carbon costs and the move towards green finance.
The European Union Emissions Trading Scheme (EU ETS) is not here to threaten local businesses. It is a sophisticated policy tool that delivers lasting decarbonization while having the necessary mechanisms to protect EU industry competitiveness.
Decarbonization is costly
Decarbonizing industries is inherently costly, and these costs vary not only within sectors but also from one region to another. Energy-intensive industries, such as aluminum, steel, and cement, are particularly vulnerable to these costs. It has been proven that carbon leakage—where companies relocate to countries with less stringent emissions regulations—can occur due to the EU ETS. So, it is legitimate to consider a potential risk to industrial competitiveness. Are some industries more advantageously positioned after facing carbon costs? Is leaving the EU and relocating a better option? The EU ETS is engineered to tackle these challenges.
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Free allocations and competitiveness concerns
For a long time in the past, free EUAs (European Union Allowances) were distributed to target the most threatened sectors and mitigate the impact of the EU ETS on their competitiveness. This made sure those sectors at risk of carbon leakage were “protected” and kept operating on EU ground. The power sector, less vulnerable to relocation, saw its free allocations decrease faster. However, this was only a temporary solution - free allocations are now being phased out and industrial decarbonization is at the center stage.
The role of the CBAM
The Carbon Border Adjustment Mechanism (CBAM) is an important reform in the EU ETS that will succeed free allowances and keep defending EU competitiveness. CBAM imposes a carbon cost on imported goods, ensuring that producers outside the EU face similar emissions costs. This levels the playing field by preventing non-EU producers from gaining an unfair advantage due to lower carbon costs. By doing so, CBAM aims to protect EU industries from carbon leakage.
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A more targeted proceeds redistribution towards the industry
The proceeds from the sale of EUAs are increasingly being targeted towards the industry. These funds finance green projects that support the transition to sustainable practices. And by better targeting these projects, the EU ETS can contribute more effectively to the industrial sector's decarbonization, while also making sure that industries remain competitive on the international stage.
The EU ETS is continually improving, with adjustments made over time to address real market conditions. The transition from free EUAs to the CBAM is just one example of how the system is gradually evolving.
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