The European Commission claims the Carbon Border Adjustment Mechanism (CBAM) is both a carbon leakage and a climate protection mechanism. VDMA is however concerned that neither goals is fully achieved through this proposal.

Amendments for the EU’s Carbon Border Adjustment Mechanism (CBAM) proposal is currently being discussed in the European Parliament. The European Commission published the legislative proposal for the Mechanism as part of the Fit for 55 climate package in July last year. Whilst the goal of the overall package is to bring all EU legislation in line with the new higher climate targets , the CBAM aims to fulfill the EU’s desire to be a global climate forerunner whilst also aiming to keep certain industry sectors competitive.

Carbon Leakage or climate protection mechanism?

The proposal for a CO2 cap mechanism is based on the EU’s plan to incentivise industry in third countries to take climate action and create a level playing field for certain raw material industry sectors within the EU. The current CBAM design however runs the risk of not fully achieving climate protection goals by not putting all revenue generation towards climate protection purposes. It also runs the risk of increasing the cost of manufacturing in Europe further down the value chain. Higher production costs due to an increase in raw material and primary goods prices would mean a loss of competitiveness for mechanical engineering companies producing within the EU.

A threat to competitiveness in Europe?

EU complex products are in direct competition with non-EU complex goods from third countries and have with higher production costs a high likelihood to be no longer competitive neither within the EU single market nor as exports at global market. Our industry sector has up to an 80% export quota. It is unclear how with the CBAM international competitiveness of EU manufacturing and exports of goods manufactures shall be ensured. Mechanical engineering companies see a high risk of carbon leakage for export-oriented industry sectors further down the value chain, both in terms of competitive prices on the global market and in terms of bureaucratic costs.

For this reason, VDMA sees a Carbon Border Adjustment Mechanism as a potential further pressure on our industry. VDMA has focused on key aspects which must be taken into account in the design of a CBAM in a Position Paper. Some of these demands include:

• WTO compatibility must be proven by the EU institutions before implementation of the CBAM. If WTO compatibility is not proven without a shadow of a doubt, the introduction of the mechanism could lead to trade retaliation measures with serious consequences for the EU exporting industry sectors such as the mechanical engineering industry.
• A thorough impact assessment of CBAM for our downstream industries producing in the EU including the higher cost burden for EU exporting industries. Some VDMA members will be affected by the higher import costs of raw materials. As companies which export a large proportion of their products, they will be less competitive on the global market and there will be a higher risk of carbon leakage.
• A CBAM as it is currently designed must not be introduced unilaterally – this would limit the possibilities for climate technology solutions offered by European companies to be implemented globally. The EU needs to set framework conditions which allow for stability and investment for a time spam of minimum 10-15 years. VDMA is concerned that if a CBAM is introduced now and extended at a later date, investments in the mechanical engineering sector could move out of the EU.
• A global climate club of like-minded countries should be supported. This would prevent climate tariffs by setting common ambition levels and avoid setting off a spiral of protectionism.
• A Carbon Border Adjustment Mechanism must support developing countries to make the transition. They are dependent on exports to the EU but cannot manage the transition to “climate-friendly” production on their own.