Session 4 presentation from the 6th Strategic Dialogue of the Carbon Market Platform, 29-30 June 2021

1. Andrei Marcu
June 30, 2021
Carbon Pricing and International Trade
Carbon Market Platform

2. • Paris Agreement strong objectives
• Increasing asymmetry of climate efforts - NDC nationally determined
• Paris Agreement objectives
• Carbon neutrality
• 1.5/20 C
• European Green Deal changed circumstances
• EU Climate Law and carbon neutrality
• Increase 2030 level of ambition from -40% to -55%
• EUA prices --- from 5 to 50
• Running out of free allocation
Why Are We Discussing This Now?
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3. 2030 Climate Targets: European Union ahead of
the curve compared to the rest of the world
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Source: Climate Action Tracker, 2021

4. - Several countries have announced Net Zero targets by 2050 (China 2060) however only a few
countries increased their ambition in the updated NDC targets by 2030
2030 Climate Targets
• EU: “Endorses a binding EU target of reduction of at least 55% in greenhouse gas emissions
by 2030 compared to 1990. Calls on the co-legislators to reflect this new target in the
European Climate Law proposal and to adopt the latter swiftly” (11 Dec 2020)
• 73 countries (including EU 27) have submitted a new or updated NDC
• However out of this 73 only a few countries submitted a stonger NDC target: EU (as a party),
Argentina, Chile, Ethiopia, Kenya, Nepal, Norway, UAE, UK
2050 Net Zero Targets
• 58 countries have communicated a net-zero targets including: EU (as a party), Canada, USA,
UK, Japan, South Africa, South Korea and China (by 2060), etc.
International climate situation: asymmetry of
climate targets
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Source: Climatewatch, 2020

5. • Border carbon adjustments (BCAs) seek to alleviate negative
effects of asymmetrical climate policies
• They can have three main objectives:
- level the playing field in competitive markets
- prevent leakage of carbon emissions to jurisdictions with weaker policies
- incentivise trade partners to strengthen their own climate efforts
BCA Definition
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6. Coverage of Trade
Flows
During the pilot phase, the proposed CBAM covers imports, with leakage related to exports addressed separately
through continued, but declining free allocation to European producers for both domestically consumed and
exported products
Policy Mechanism It could extend the ETS to imports, but have imports dealing in a virtual pool of allowances
Geographic Scope The only national exemptions from the coverage of the proposed CBAM are for least developed countries, small
island developing states, and states with whom the EU has linked emissions trading systems.
Sectoral Scope Cover any sectors, sub-sectors identified at risk of leakage under ETS
As well: Any sectors at risk of leakage due to carbon costs in input goods (Scope 3)
Emissions Scope During the pilot phase, the proposed CBAM covers direct (Scope 1) emissions and indirect (Scope 3) emissions
embedded in raw material inputs that are themselves covered products.
Determination of
Embedded Emissions
Default emissions intensity for importers: global sectoral average
Possibility for more than one sectoral benchmark, based on production method
Importers can challenge the default with third-party verified data
Calculation of the
Charge
Product of:
• Global average intensity
• Difference between the price of EUAs and an explicit carbon price in the exporting jurisdiction
• Factor that reflects the amount of free allocation received by EU producers
• Where no explicit price of carbon in exporting jurisdiction: cost of carbon based on a negotiated agreement
between the EU and the country of origin
Use of Revenue Revenue directed to:
• Administrative cost
• Defraying certification costs for importers
• Funding mitigation actions in trade partner countries affected by the CBAM;
• Contributing to the EU budget (“Own Resources”) 6

7. • US overview – White House carbon neutrality annoucements
• California - existing BCA for electricity
• New York State - draft of a Carbon Pricing Proposal containing the BCA provision
• US/China/EU Club – potentially covering over 60% of global emissions
• Canada and the provincies exploring the potential of a border carbon
adjustment (Biden – Trudeau cooperation)
• UK - COP 26 and G7 presidencies
• Ukraine - adopting EU’s acquis, potentially considering EU-like CBAM
• China remains cautious towards the EU CBAM (trade issues)
• Japan is considering further carbon pricing and BCA
BCA discussion Status – climate diplomacy
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8. • California grants free allowances to industrial facilities according to a tier-based approach to assess the
carbon leakage risk, which divides installations into tiers of “low”, “medium”, and “high” based on levels of
emissions intensity and trade exposure.
• The free assistance factor is lower for facilities with a lower leakage risk. However, amendments to the
regulation set all assistance factors to 100% for 2021-2030, citing continued vulnerability to carbon leakage
• California’s ETS holds “first deliverers” of electricity liable for emissions of electricity imported from outside
California (in the absence of a linked ETS)
• Where the carbon intensity of an electricity source is unspecified, is is assumed to be above the coverage
threshold, and subject to a default emissions factor
• Challenge: Resource shuffling – entities lowered their compliance obligation by substituting low-carbon
electricity and swapping out related PPAs
• Addressed by updating the regulatory framework, which now expressly proscribes resource shuffling and
sets out a detailed list of “safe harbor” practices
California‘s BCA for Electricity Imports
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9. • National price on carbon (Healthy Recovery – December Action Plan)
• Greenhouse Gas Pollution Pricing Act gives flexibility to provinces placing minimum
price
• The charge which will rise to $50 per tonne of CO2 by 2022, begins at $20 in 2019and
increases by $10 per year until 2022, in discussion $170 for 2030
• Canada is exploring the potential of a border carbon adjustment and
committed to discussing this idea with international partners. This type of
adjustment attempts to prevent carbon leakage
• In Canada’s case the policy instrument would presumably be the output-
based pricing system (OBPS), a regime stablished under the Greenhous Gas
Pollution Pricing Act (GGPPA) – federal level
Canada national level
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10. • Identifying sectors vulnerable to leakage in the UK, and assessing
policy options and their implications to address leakage risks,
focusing in this instance on a border carbon adjustment (BCA)
similar to the EU CBAM
• The UK is considering this option without preference to other ways
to address carbon leakage – linking the ETS
UK
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11. • Existing bilateral or regional arrangements – such as the EU Association
Agreements – as grounds to merit an exemption
• First, countries in such relationships have intense and deepening trade relationships
with the EU (customs union)
• Second, those countries have typically committed as part of their agreements to
strengthen environmental policies, adopting EU’s acquis
• Readiness to be part of the EU CBAM, during the transition period of
establishing the ETS system and joining the EU scheme
Ukraine
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12. 12
The evolution of the EU carbon leakage framework
• EU Installations considered to be at a high risk of carbon leakage receive a high share of
free allowances
• An official list of sectors and sub-sectors deemed at risk of CL is continuously amended,
to reflect technological change and increased EU climate ambition
• During phase 3 (2013-2020) of the EU ETS, a sector is considered to be at risk if two
conditions are met:
 The sum of direct and indirect additions costs is at least 30; or
 The non-EU trade intensity is above 30%
• The amount of free allocation for each installations is calculated based on a formula
where production quantity is multiplied with the benchmark value for that particular
product, which is equal to the emissions per ton of product emitted by the best
performing 10% of EU installations
• Installations in the carbon leakage list receive 100% free allocation at the benchmark
• Free allocaiton for Installations in other sectors is reduced, from 80% in 2013 to 30% in
2020

13. 13
The evolution of the EU carbon leakage framework 2
• During the period 2013-2020, 43% of total allowances will be available for free allocation
• If demand exceeds 43%, a cross-sectoral correction factor is applied, equalt to 22% in 2020.
• In phase 4 of the EU ETA (2021-2030), free allocation will focus on sectors at high risk of CL, for
less exposed sectors free allocation will be phased out after 2026, from 30% to 0% in 2030.
• Free allocation will better reflect actual production levels and technological progresses.
 Benchmark values will be updated twice in phase 4, the annual reduction rate will vary
between 0.2% and 1.6%, depending on the innovation uptake of the sector
 Allocation to individual installations will reflect relevant production changes, with a
thresholds for adjustment set at 15%, to be assessed every two years
• The EU still lacks an harmonized approach for indirect cost compensation, which is largely left
to the discretion of MS
• The Commission has hinted that sectors covered by CBAM will no longer be eligible for free
allocation
• Other stakeholders argue that CBAM and FA can be complementary, with FA covering emissions
at the benchmark and CBAM being applied on emissions exceeding the EU benchmark.