the parliament would react to formal proposals , but the narrow margin indicates that this is a controversial issue , with difficult to predict outcomes .
The EC plans to apply the CBAM initially to selected sectors , which it is in the process of identifying . The parliament has suggested cement , steel , aluminium , oil refineries , paper , glass , chemicals , and fertilisers as candidates for the pilot phase . It also suggested the power sector , which does not receive free allowances and so has a very strong chance of being one of the first sectors covered . The EC plans to choose the pilot sectors based on a mix of their greenhouse gas emissions , their trade and carbon intensity as defined in the ETS directive , and how difficult it would be to enforce a CBAM , it said in a case study on decarbonising steel on 5 May .
The changing availability of free allowances , the CBAM links to ETS prices , and overlapping emission-reduction policies such as renewables and efficiency targets will impact hedging demand for EUAs , according to analysts . This is set to become more volatile , as the power sector ’ s falling emissions reduce its influence , and heavy industry takes over as a key driver of demand . A CBAM which meant some sectors lose their free allowances more quickly than expected could impact heavy industry ’ s future hedging demand by anything from tens of millions to hundreds of millions of allowances , Stuart Evans from consultancy Vivid Economics estimated earlier this year .
Making importers buy virtual allowances linked to ETS prices would also stimulate hedging demand in the real ETS , according to Andrei Marcu , executive director of the European Roundtable on Climate Change and Sustainable Transition ( ERCST ). “ If prices are linked you will see hedging
in real markets , because that ’ s what traders do ,” he told a webinar on the CBAM on 22 April . The hedging demand changes have implications for the ETS market stability reserve ( MSR ), which smooths out demand and supply shocks , and since 2019 has been soaking up some of the huge surplus of EUAs that have built up in the system .
Power utilities have called for the MSR to continue taking in 24 % of surplus EUAs after 2023 if the total in circulation exceeds 833m , to keep the carbon price signal robust and so promote investment in low carbon technologies . A study by the ERCST on 29 April , however , urged sticking to the current rules which would see the intake rate fall to 12 % from 2024 , leaving more EUAs in circulation for hedging . It argued that this would deliver smoother carbon price rises given the higher CO2 cuts – estimated at 63 % – that ETS sectors would have to deliver to help achieve the EU ’ s overall 55 % CO2 cut by 2030 .
The EC has said it is planning a World Trade Organisation-compatible CBAM proposal that it will be able to defend and enforce . But there is also a possibility it may not be needed in the end , said the EC ’ s executive vice-president for European Green Deal , Frans Timmermans , on 7 May . The 18 months to two years it will take for the EU to debate and agree the proposal was also time for economic rivals like China and the US to analyse the potential impacts , he recently told a European University Institute webinar . The EU would not have to apply a CBAM where countries took measures that ensured a level playing field for EU industry . “ That ’ s my hope ,” he said . n
Montel Magazine 2 – 2021