Just when you thought you had CBAM figured out, the EU is thinking about making it even bigger. But why? Let's break it down.
Here's the puzzle that's giving EU policymakers a headache: CBAM might be too good at its job. By making it expensive or complicated to import certain materials, it could trigger an unexpected chain reaction within the manufacturing industry within the EU.
Companies might look at the costs and paperwork and think, "Hey, why bother with all this?" Instead of importing materials and juggling CBAM calculations, they might decide to move the production of their final products - which aren't currently covered by CBAM - outside the EU altogether.
Then, they could simply import these finished products back into the EU, neatly sidestepping any CBAM obligations. It's like trying to put a fence around your garden, only to find that the rabbits have learned to use the gate…
Whether offshoring production is worth it is of course dependent on more factors than CBAM, as regular customs duties are intended to be higher on finished products than raw materials for exactly this reason.
But this potential CBAM loophole isn't just a small crack in the system - it could turn into a flood that washes away the very benefits it was designed to create. This was always the risk of limiting the scope of CBAM to (in principle) industrial inputs at first, and it was always the intention to expand the scope over time.
Now, you might be wondering, "What's the big deal if companies move some production around?" Well, it's not just about shuffling papers and products. There are two major concerns that have EU officials biting their nails.
First, if companies start moving their production outside the EU, we're not just talking about losing a few assembly lines. We're looking at entire factories packing up and leaving, taking a boatload of jobs with them. That's a recipe for economic heartburn that no amount of policy antacid can easily cure.
The second worry is that this shuffle could lead to more CO2 emissions playing hide and seek with regulators. If companies import finished products instead of materials, all the carbon emissions from making those products become invisible to CBAM.
So, while CBAM was meant to be a carbon diet plan for imports, it might accidentally end up supersizing Europe's carbon footprint instead.
So, what's the EU's grand plan to plug this carbon-leaking dike? You guessed it - they're thinking about making CBAM even bigger! Their solution is to cast a wider net by including what they call "downstream" products. These are the finished goods made from materials that CBAM already covers.
On paper, it sounds logical. Can't catch the carbon at the ingredient stage? No problem, we'll catch it in the final product. But here's where things get a bit... let's say, interesting.
Remember when CBAM was first introduced? It was supposed to be this laser-focused tool aimed at big industrial polluters. Fast forward to today, and it's catching small businesses importing a handful of screws. That's right, screws. Now, imagine if CBAM expanded to cover anything made with those screws…
This all goes to a broader question you can ask about EU industrial policy right now. You can wonder if trade defense measures are truly the best drivers of industrial policy and innovation. This is a slow moving process that puts a lot of pressure on consumers, as increased costs get passed on and we're ultimately depending on consumer demand to drive industrial policy.
At some point, you have to wonder: are we solving the problem, or just making things really, really complicated?
Is the solution complex? Nope! Even better, our proposed solution is so simple that it is the shortest section of this entire article.
The EU wants to hear from you. They're asking about the hassle and costs of CBAM.
At Veros, we want CBAM to work in the real world, not just on paper. We're sharing our thoughts, and we think you should too.
The EU's survey can be found here, and is open until 25 October 2024.
CBAM is here to stay, but it can change. Let's shape this together. After all, if we're going to help the planet, we might as well make it work for everyone.