How a triple legislation whammy could push manufacturing outside of Europe.
Tuesday 14 April: Last autumn, we wrote an editorial expressing strong concerns about the European Union’s upcoming Carbon Border Adjustment Mechanism (or CBAM). The article struck a nerve.
We laid out the devastating effects this pricing system could inflict on Europe’s manufacturing industries. While Europe likes to think of itself as a continent of great ideas, it is also a continent that still builds great things.
Yet CBAM, combined with the phaseout of the Emissions Trading System (ETS) free allowances, will create multiple issues for those who purchases large amounts of steel and aluminium. The cost of these materials will increase exponentially over the coming years, and crucially, this will coincide with a new European steel safeguards that will raise prices even further.
It is the combined triple effect of these measures that could cripple Europe’s manufacturing industry.
At the time we went to print, there were only weeks to go before CBAM came into effect. Efforts by policymakers have subsequently produced some attempts to reform the scheme and reduce the harm to our industry. Namely, they extended the list of products covered by the mechanism, as policymakers saw the significant unintended consequences. This is referred to as a ‘downstream extension.’ Policymakers also created a temporary decarbonisation fund.
Nonetheless, multiple craters remain in the road ahead for Europe’s technology manufacturers. Imposing such challenges on our industries could prove short sighted, given we produce many of the tools that make modern economies work. We form the largest manufacturing sector in Europe. We are one of the most export-oriented. We make industrial machinery, heat pumps, electric car charging systems, and airport scanners. We make the electricity grid.
A stunning three quarters of the products we surveyed - less than a year ago – are at risk of relocating to production sites outside of the European Union by 2034.
Yet a stunning three quarters of the products we surveyed - less than a year ago – are at risk of relocating to production sites outside of the European Union by 2034. We are betraying our own industrial backbone, our cleantech suppliers and those who develop clean-energy systems.
The cost of aluminium and steel is expected to accelerate in the years to come. This means companies will face an even further increase in production costs, hitting up to 48% in some cases. These are the choices EU policymakers are making, that will wipe out our ability to compete with other producers on either the EU or international markets.
We are betraying our own industrial backbone, our cleantech suppliers, and those who develop clean-energy systems.
The intention behind CBAM is admirable. Europe wants to pursue emission reductions - and to deliver those reductions on home ground. To help us achieve these goals, we believe CBAM needs to be reformed in three key ways:
- First and foremost, we need measures to restore export competitiveness for our industries. CBAM increases manufacturing costs and puts our industries at a disadvantage when exporting outside the EU. For the moment, EU policymakers have put in place no solutions to address this issue.
- Second, we need to minimise the administrative costs and burdens related to the implementation of CBAM, especially in the first years of application. It is key to postponeme the deadline to submit the first annual CBAM declaration to 31 December 2027, to allow more time for companies to have actual emissions verified by accredited verifiers.
- Third, we call for an effective “emergency break” allowing for goods to be removed from the scope of CBAM in case of excessive price increases that severely harm users of those goods.
Re-desigining CBAM's implementation in these ways will help Europe’s to preserve its industrial base, protect jobs, and maintain the EU’s attractiveness as an investment location and thus to achieve the climate targets of 2040 and 2050 respectively.