As several events display in today’s world, many questions are being raised about the future of energy in the EU. In November, during the COP26, countries gathered around the table to discuss the threat of climate change, turning tomorrow’s problem into today’s, and rightly so. We witnessed pledges such as full decarbonization and complete energy transition to renewables, however, this will come at a cost. Amidst battling a fourth wave of the Covid-19 pandemic, being faced with higher oil prices and pressure from various environmental groups, the Union is trying to set a new path for the energy transition. The purpose of this article is to discuss EU energy policies and laws related to this transition.
Carbon Border Adjustment Mechanism (CBAM)
The past year did not fall short of new ideas and actions on how to move towards clean energy. New legislation and proposals were put forth by the European Commission (EC) to tackle carbon emissions. On the 30th of June 2021, the EU adopted The European Climate Law Regulation and set a target of net reduction of greenhouse gas emissions by at least 55% by 2030.[1] Previously, the goal for net reduction stood at 40%. The purpose of this regulation was to revise the past climate law to reach the goals established in the European Green Deal. The Green Deal was made by the EU Member States during the beginning of the Covid-19 pandemic, with the purpose of turning the EU into the first climate-neutral continent.[2] Before being adopted, the content of the regulation was communicated to UNFCCC in December 2020 as the EU’s official NDC under the Paris Agreement.[3] Yet, apart from being optimistic, EU legislators also acknowledged the practical challenges behind this goal.
The EU claims to be the global leader in transitioning towards climate neutrality,[4] however, efforts to reach the targets could be undermined by EU’s international partners, who perhaps might have lesser ambitions.[5] To address this issue, on 14th July 2021 the EC proposed the creation of a Carbon Border Adjustment Mechanism (CBAM). The plan is to put a carbon price on all imports whose means of production exceed EU standards on carbon emissions.[6] In this way, foreign companies will be subject to the same production regulations that apply to EU companies, regardless of their location.[7] At the same time, the increased price for importing such products will discourage foreign companies from further investing in them. The tax will be fully operational in 2026.[8]
Not only is the EU aiming to urge its international partners to adopt similar climate standards, but at the same time, preventing EU companies from seeking to re-establish abroad for laxer carbon regulations,[9] and here’s how. With the carbon tax in place, EU companies will raise prices for their products to retain their profit. Consumers, on the other hand, will look for cheaper products coming from non-EU countries where carbon regulations are not as strict. If the CBAM is not adopted, EU products will be replaced with imported ones. This will increase the share of the foreign companies in the EU market. To prevent a loss of share in the market as well as avoid the tax, EU companies will be incentivized to re-establish outside the EU. However, with CBAM in place, every importer will have to pay the same carbon tax as EU producers, thus, defeating the purpose of re-establishing abroad. Furthermore, because of being faced with higher carbon taxes foreign companies will be forced to increase their prices as well, something which will prevent them from obtaining a large market share.
Other countries like the US are planning to introduce similar measures, however, doubts have been raised on the compliance of the CBAM with trade law. As far as the WTO legal framework is concerned, in appearance CBAM does not infringe on the most-favored-nation principle or the national treatment principle. To clarify, the former principle requires states to apply the same treatment to every country when it comes to imposing trade measures.[10] The latter, on the other hand, requires states to apply the same trade measures to both domestic and imported products.[11] As far as the CBAM is concerned, the carbon tax is expected to be imposed on all products that cause carbon emissions, regardless of where they come from. One could make a case that this amounts to an equal treatment, however, states use different accounting systems, and this could cause issues in tax calculations.[12]
Most importantly, discrimination might result because of a lack of attention to the needs and abilities of non-EU countries to adjust to the EU’s climate agenda. Article XX(g) GATT requires states to recognize third-world regulatory capacities when designing environmental regulations.[13] At the moment, the proposal does not seem to be in line with this requirement.[14] Concretely, the EU states that it will explore possibilities for agreements with affected countries, but these agreements will remain as an alternative to the application of the CBAM.[15]
When it comes to nations with emerging economies like Brazil, China, India, or South Africa (BRICS nations), CBAM is viewed as a trade barrier. The reason why is that most of the production occurs there, and as of now, their means of production do not meet the EU climate standards. Consequently, these standards could hamper their development and slow down their ability to make a transition matching that of developed nations. Amongst many, Russia, a main energy exporter to the EU, does not stand to benefit from the CBAM either.[16] In fact, it is estimated that the carbon taxes could cost Russian gas companies $33 billion between 2025 and 2030.[17] Therefore, to address these issues, the EU will have to engage in several discussions with its partners.
Taxonomy Complementary Delegated Act
When it comes to measures towards energy transition, the CBAM is not the only EU measure that is expected to have a global impact. Understandably, the major energy switch requires large investments strategies and shifts of capital to renewables. At present, the EU taxonomy is the instrument regulating the interlinkage between private investment and activities needed to achieve climate neutrality.[18]
As with any other investment, investors need to first be aware of the quality of the product before putting in the capital. As far as the EU Taxonomy is concerned, investors need to ensure that the product or economic activity at hand fulfils the criteria for being categorized as sustainable or green. However, the distinction is not always clear. In fact, there are disagreements on what constitutes environmentally friendly, something which inevitably confuses investors and causes them to be reluctant.[19] That is why the Commission has put forth a classification system in the EU Taxonomy that offers a list of environmentally sustainable economic activities where investors can rely on.[20] For example, investments in the maintenance of natural forests or the manufacture of low carbon technologies are considered sustainable.[21 Investors will use this list as a common dictionary to check whether the economic activities of their interest are green-labelled.
However, speaking of disagreements, as we passed into the new year, the Commission proposed to include in the classification system projects involving natural gas and nuclear energy. This means that the two sources of energy will also be labelled as green, thus prompting investors to direct their capital towards them. This proposal received a huge backlash, especially from countries such as Austria and Germany who have doubts on whether the use of the resources falls in line with the 55% reduction target. Though, a full energy transition cannot take place overnight, and the Commission’s assessments show that both sources of energy will be crucial for the transitioning process.[22] Furthermore, the Commission has a plan to ensure transparency in the investment process by adding tighter control to the financial products.[23]
It is expected that the EU taxonomy will become a global standard. That is because globalisation has connected multiple investors with different countries and has allowed for sources of capital to flow around the world. A certainty in investment in the EU will attract more foreign investors who will in turn demand similar transparency conditions in their countries. At the same time, foreign companies dealing with EU investors will be inclined to push their countries to adopt these standards to meet their clients’ demands.[24] However, it is important to understand that the key to making this policy successful is to make it attractive for investors to invest in green energy. So far, this remains a challenge.
[1] Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 of June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (‘European Climate Law’) OJ L 243.
[2] European Commission, ‘Delivering the European Green Deal’ (European Commision) <https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en> accessed 16 January 2022.
[3] Submission by Germany and the European Commission on behalf of the European Union and its Member States, ‘The update of the nationally determined contribution of the European Union and its Member States’ 17 December 2020 <https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/European%20Union%20First/EU_NDC_Submission_December%202020.pdf> accessed 16 January 2022.
[4] Regulation (EU) 2021/1119 (n 1) para. 16.
[5] Proposal for a Regulation of the European Parliament and of the Council of 14 of July 2021 establishing a carbon border adjustment COM/2021/564 final preamble para. 8.
[6] European Commission, ‘Carbon Border Adjustment Mechanism’ (European Commission) <https://ec.europa.eu/taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en> accessed 16 January 2022.
[7] ibid.
[8] ibid.
[9] ibid.
[10] General Agreement on Tariffs and Trade 1994 (adopted 21 March 1994, entered into force 1 January 1995) 1867 UNTS 187 (GATT) article I.
[11] ibid article III.
[12] ZHANG Jianping and XIE Zhiyu, ‘Climate change, trade policy and the WTO’ in Bernard Hoekman, TU Xinquan and WANG Dong (eds) ‘Rebooting multilateral trade cooperation: perspectives from China and Europe‘ (CEPR Press 2021).
[13] ibid. article XX(g); WTO, United States: Import Prohibition of Certain Shrimp and Shrimp Products – Report of the Appellate Body WT/DS58/AB/R, (6 Nov. 1998) paras. 142-144.
[14] Gracia Marin Durán, ‘EU Carbon Border Adjustment Mechanism: Key Issues Going Forward’ (021) European Foreign Affairs Review 499.
[15] ibid.
[16] Thane Gustavson, ‘Klimat, Russia in the age of climate change’ (1st Edition, Harvard University Press, 2021) p. 50.
[17] ibid.; Anna Fadeeva, ‘KPMG otsenila ushcherb dlia Rossii ot vvedeniia uglerodnogo naloga v ES’ (RBC, July 7, 2020) <https://www.rbc.ru/business/07/07/2020/5f0339a39a79470b2fdb51be> accessed 16 January 2022.
[18] European Commission, ‘EU Taxonomy: Commission begins expert consultations on Complementary Delegation Act covering certain nuclear activities’ (European Commission) <https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2> accessed 16 January 2022.
[19] The Economist, The EU’s green-investing “taxonomy” could go global’ (08 January 2022) <https://www.economist.com/finance-and-economics/2022/01/08/the-eus-green-investing-taxonomy-could-go-global> accessed 16 January 2022.
[20] European Commission, ‘EU taxonomy for sustainable activities (European Commission) <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en> accessed 16 January 2022.
[21] EU Technical Expert Group on Sustainable Finance, ‘Taxonomy Report: Technical Annex’ (March 2020) <https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf> accessed 16 January 2022.
[22] European Commission website (n 18).
[23] ibid.
[24] The Economist (n 19).
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