Carbon Tariffs & Global Trade: Inside the EU’s CBAM Plan

On January 1, 2026, the European Union will launch its Carbon Border Adjustment Mechanism (CBAM)—the world’s first carbon tariff on imported goods. Designed to support the EU’s ambitious decarbonization goals, CBAM will impose a carbon fee on imports such as steel, aluminum, and fertilizers, while seeking to ensure the competitiveness of European industries.

In this episode, Mohammed Chahim, the European Parliament’s lead negotiator on the carbon border fee, breaks down how CBAM will work, its role in the EU’s broader climate strategy, and what it means for global trade. He also discusses how the tariff could affect exporters to the EU, including the United States, and how policymakers aim to navigate potential trade disputes.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

Just under ten months from now, on January 1, 2026, the world’s first carbon tariff on imported goods will take effect. On that date, the European Union will implement its Carbon Border Adjustment Mechanism, or CBAM, which will impose a carbon fee on imports such as steel, aluminum, and fertilizers. The tariff is part of the EU’s push to meet ambitious decarbonization targets, while ensuring that its own industries remain competitive.

On today’s podcast, we’ll talk with one of the architects of CBAM. Mohammed Chahim is a Dutch member of the European Parliament and was the Parliament’s lead negotiator on the carbon border fee. He’ll explain how the carbon tariff will work and its role in the EU’s broader decarbonization strategy. He’ll also explore the impact that the tariff may have on exporters to the EU, such as the United States, and potential trade disputes surrounding CBAM and their remedies. Mohammed, welcome to the podcast.

Mohammed Chahim: Thank you for having me, Andy.

Stone: You’re a member of the European Parliament, and the European Parliament’s rapporteur or negotiator for CBAM, which is the carbon border tariff. Before we go on to talk about CBAM itself, could you tell me about your role as a member of Parliament and the work that you do as the CBAM negotiator?

Chahim: Yes, on the European level, we basically have three branches of government. We have the European Commission, which can be seen as a group of ministers or secretaries from each member state, one. So we have 27. They are the ones who can come up with legislation.

Then we have two other branches. The Parliament, that’s selected every five years. We have 720 members from 27 countries. Then we have the Council of the EU, or the European Council. It depends on whether the prime ministers are there, or let’s say the ministers are responsible for a certain task. They, together with the Parliament, we are the legislative part, you could say, of the government. We are the ones responsible for the final texts that the Commission basically presents.

Someone could use this analogy, saying that the Commission launches legislation, let’s say a rocket, and then the Parliament and Council together decide the trajectory. And whether it lands in the right place, this is something that the three of us are responsible for. The rapporteur is the main negotiator on behalf of the Parliament that negotiates with the Council. The Council’s chairmanship also moves from country-to-country. They have a six-month presidency, and together with the president of the Council, you negotiate and try to do a lot of preparatory work before you end up with the final text, which of course needs to go to Parliament, through Council again, and then becomes a legislation.

Stone: So you are now in the United States for about a week. You are doing a bit of travel around. I believe earlier this week, you were in Washington, meeting with officials on the Hill. Tell us a little bit about what you are doing here in the country right now.

Chahim: When I travel to the US, it’s a long distance. I try to make my trip as useful as possible, so usually I talk to people from the administration. Now this time, that was not the case because it wasn’t that easy, I think, and there are other things happening. But also, for example, interlocutors, so members of the House, senators that work on energy and climate policies like I do. I tend to have discussions with students, with scientists, but also with think tanks to get inspired, but also to interchange ideas. So I try to make my trip as useful as possible.

Stone: So the EU’s Carbon Border Adjustment Mechanism is a combination of environmental and trade policy. It will place a fee on the embedded carbon for certain imported goods. Can you talk us through the dual purpose behind CBAM and how, at a high level, it will work?

Chahim: In order to understand the Carbon Border Adjustment Mechanism, you cannot explain it without explaining that we, for 15 years already, have a European carbon trading system. So we have a carbon price actually in place, and a cap-and-trade system, you could say, with allowances that companies can buy and that they need to buy when they are polluting. This has been in place for roughly 15 years, and it is working quite well. What we do there is we try to make it a bit more ambitious because we have pledged to be climate-neutral by 2050.

In order to make sure that that level playing field between what we ask our producers to do and to commit to carbon neutrality, but also to pay for their emissions — that gap becomes bigger and bigger if we do not have similar policies for our importers. It doesn’t make sense that you basically ask your own producers to produce in a certain way, to be as clean as possible, or else ask them to pay a price, and then let others, competitors from outside Europe, bring in their products and then compete unfairly.

For that, we created the Carbon Border Adjustment Mechanism. It’s one of the few tools Europe has to incentivize others to decarbonize. What we say is, “You are more than welcome to sell your products in Europe. We like trade, and we’d love you to come and sell your products. And if you produce cleaner than our producers, you will have a benefit there.” But we have conditions, and those conditions are that you either pay for your own pollution domestically, or else we’ll have a levy at the border.

Stone: As you mentioned a minute or two ago, this is the latest evolution of the European Union’s Emissions Trading System, right?

Chahim: You can look at it as an extension of that.

Stone: An extension of that, right? So allowances have largely been free for much of the history of that ETS. Now there’s a price on those allowances, and this is an adjustment to accommodate that, as well. Could you explain that?

Chahim: Yes. In the past, to make sure that this difference or this distance between producers outside Europe and within Europe, to make sure that so-called “carbon leakage” was minimized, we compensated partly sectors for their emissions. So they didn’t pay one hundred percent of their allowances, but roughly, let’s say 30 or 40% and sometimes a bit more. So a part of their emissions, we gave them basically a free pass so that they could produce without paying for that share. But then everything on top of that, they needed to start paying.

We have a methodology, how we calculate that threshold. We look at the 20% best producers in your sector, with your peers, and those we define as the benchmark. So those producers get 100% free allowances. And you as a producer are compared to them. So everything you emit more than they do, you have to start paying for. And that’s how we set up this system that works very well. Mind you, those sectors that represent 40% of all European CO2 emissions have decreased their emissions by more than 20%, while still having grown in the same period, with almost 60%. So this free allowance is basically a measure also to make sure that companies do not move their production outside Europe. It’s a carbon leakage measure.

What we now do in place of that is this Carbon Border Adjustment Mechanism. So it’s an alternative carbon leakage measure. At the same time, we can make sure that the price signal of polluting becomes complete without this effect of free allowances for our own domestic producers. At the same time, we are asking producers from outside Europe to pay also for their fair share. That’s the dual effect of CBAM.

Stone: And there are about a half-dozen different products, commodities, that are included in CBAM? Those are trade-exposed commodities, high-carbon content commodities, but can you tell us what are those commodities?

Chahim: So roughly it’s about six sectors. It’s about steel, aluminum, cement, hydrogen, fertilizers, and electricity. Those are the six sectors. Five initial sectors, and then hydrogen, we added last-minute, also so that legislation becomes more robust. We believe that in the future, much more hydrogen will be sold and exported to the EU because it’s an alternative molecule for, let’s say carbon, hydrocarbons from fossil sources. We want to make legislation as robust as possible.

If you look, then, at every sector, every sector has x-number of products that belong to that sector, that we have included in CBAM. So the total list is longer than a couple dozen. I would say a couple hundred of products that are defined with a product code, and that customs in the EU are used to and know. And then they check when these products are imported, whether the CBAM declaration is filled in correctly, and whether the payments are done, especially starting the first of January, 2026.

Stone: So you’re going to be covering the embedded emissions in these imports? It may seem obvious, but I wonder if you could explain a little bit, what does an embedded emission entail?

Chahim: Yes, so what we do is we look at different scope emissions. So that’s all direct emissions, emissions that are associated with the production of that product. For example, when you produce steel, you have cokes that you use, but you can theoretically also use coke to produce electricity. So the first scope is then Scope 1 emissions, the embedded emissions, but we also look at indirect emissions, basically electricity. In the future, we’ll also look at association to warehousing and transport, but that’s something for the future. We want to have basically all emissions associated to the production of a product, in order to have a good look at what the footprint is of this product, but also to distinguish between producers that take all those steps into consideration to decarbonize. We want to incentivize but also value the steps that producers take to decarbonize. The more we can include, the more we can value this comparative advantage from a climate perspective.

Stone: So you’re talking about imports that can come from anywhere on the globe, and that implies that this is going to be an administratively complex undertaking, right? Importers will be required to purchase certificates to cover these embedded carbon emissions that we’ve just been talking about. How is that embedded emissions going to be determined, and how is it going to be verified? Again, you’re relying upon the importers to tell you what’s in these products.

Chahim: Let me first say we live in an age of data and collection of data, and we have a lot of information. We always act as if these types of developments are complicated because you need to collect data. And then I think, “We live in an age of AI.” We live in an age where databases, where companies have information about you that you don’t even know. So let me say that data is not the issue. Developing and getting and collecting the data, yes, but we have experience with that.

So everything in the legislation deals with the methodology. We have experience in Europe how to calculate these emissions. We have a system in place, and we have companies that validate these emissions. So we have a way to audit this. But of course it’s not simple to set up. You need to have time, on one hand, to validate, report, monitor — because that’s part of this type of legislation. But the European Commission, our executive branch of government, has a lot of knowledge and is more than willing to help other countries set up a system, but also share knowledge on how to do this. And the same holds for many of these companies that are usually global companies, multinationals, that have facilities in Europe, but also outside Europe. They already know how to deal with this legislation because it was part of the Emissions Trading System, of the ETS system. So hopefully we will be ready enough, and now we have still ten months to go, to make sure that every importer knows what to do. Usually the importer, by the way, is European, so they also know the methodology and the way to get it done, or else this becomes like many other elements in the world.

If this is the framework under which you need to thrive, then you have companies that succeed and those that don’t, and that’s not necessarily a bad thing. If you cannot get it done, then probably your companies that need to fulfill this requirement will buy it somewhere else, and you’ll have a comparative disadvantage, compared to your peers that have the knowledge and know how to do it.

Stone: You also have default values, where the embedded carbon can’t be calculated.

Chahim: Yes, so in order to have this transitional period, then I think in the future, to make sure that if — and we can imagine that sometimes it is very complicated, especially in certain countries where this technology still needs to be implemented. This data has to be collected and verified. For those, we have this “default value” that you can take, but it’s not necessarily a friendly carbon content, and also there we are having certain discussions to see whether we could tweak it a bit to incorporate this different starting point that some countries have globally.

Stone: I want to ask you a bit more about how the border carbon adjustment or the fee will actually be calculated. We’ve just talked about the embedded carbon, and in calculating that, then going to take that quantity of embedded carbon, and you’re going to multiply it by the carbon price. That carbon price is actually the price that’s established in the European Union’s Emissions Trading System. Can you talk about how that carbon price is actually determined?

Chahim: Yes, that carbon price is determined through a market mechanism. It’s a cap-and-trade system. So we monitor the number of allowances that are made available year-to-year, and those will be yearly decreased until you reach a certain goal. And then they are auctioned, and there is even a secondary market where you can buy allowances. Price is determined based on demand.

A couple of years ago, we hit 100 euros a ton, which is roughly 100 dollars a ton of CO2. Then it dropped significantly, to almost 50 euros or dollars per ton, and now it’s up again to around 80 to 83 euros a ton. So it’s a market mechanism, and there are also companies that buy and sell these allowances. It does a whole financial market of EU ETS products on the secondary market.

Stone: So that carbon price again is tied into what the current EU ETS price is. That’s the same price that would be levied on the importers.

Chahim: Yes. The CBAM certificates will be sold based on the average of a week — the week average, week price of an EU ETS. So that also gives you a bit of, let’s say, room to look at the market, whether the price will increase or decrease. The companies that do that well can also differentiate themselves from others, yes.

Stone: I want to jump back to the earlier discussion about the sectors that are going to be covered, the commodities. It’s interesting that those are commodities largely looking at steel. We’re looking at aluminum, et cetera. We’re not looking at finished products, and I wanted to ask you about that. Why are finished products not included, because anything could be imported? Obviously if it’s a car, there’s a lot of carbon content in that car, but it’s not going to be subject to a fee.

Chahim: Yes, so I have to acknowledge these types of new systems are not that easy to implement. The last one-and-a-half years, CBAM has been in effect. The difference with  January 1, 2026 is that that is a starting point that companies need to submit and hand over CBAM certificates. So we’ve used the last roughly one-and-a-half years to understand how does this legislation look in practice? Can we collect the right data? Do we already see certain circumvention issues, et cetera, et cetera? In order to set this up for finished products, way more data and way more monitoring is needed.

Stone: That supply chain, you’ve got to deal with, right?

Chahim: Exactly. And not only that. If you take a piece of metal, it could enter and exit, enter and exit, enter and exit maybe ten times before it ends up in a finished product. And then it’s very complicated to have a system where you monitor — Okay, CBAM certificates are paid, and now it goes away. Then we have to make sure that they don’t double-pay. To set up a system for something like that, way more information is needed, and way more monitoring and data tracking is needed.

To introduce a very complicated system, a piece of legislation, but also those complicated dimensions, that’s not something we would want to do. We would want to phase it in, let’s say step-by-step. We take the largest sectors that are heavily traded commodities that have a very high CO2 content. Those are the ones that we start with, bulk products. Maybe the next phase we will look at products further downstream. Maybe we’ll also grow CBAM’s scope more horizontally, where we add other sectors. With that, step-by-step, we will finish up at the end with all ETS sectors that exist. And as far as I know, also that finished products are not part of ETS, of course. Of course the manufacturing process is, and also that is a difference. CBAM will look at products, and we do not look at the installation.

Stone: The installation, meaning the factory?

Chahim: Yes. In the EU, you pay not based on a product. You are based on the installation, so you can produce several products at that facility, but you pay on the emissions in total. It makes sense because you produce everything within the EU. Of course when it comes to products, you’re sending your products overseas, and then you have to associate the embedded emissions within your already facility, production facility, and have to allocate it to all the products that you are exporting. That’s already a quite complicated exercise, and for that we limited the scope for now.

Stone: Again, imports to the EU will be charged this carbon fee, the carbon tariff, upon entering into the EU. An interesting detail I want to dive into with you a little bit further is the fact that there is an adjustment mechanism as part of this. So if a product is produced in a country where there is already a carbon price, that price that may be paid in the country of origin is deducted from what’s paid at the border.

Chahim: Yes.

Stone: Tell us about how that will work, and it seems like this is actually also a motivation for countries to develop their own carbon pricing program.

Chahim: I hope that one day a revenue will be zero euros, that this will be the most redundant legislation you can think of, because that means that either we decarbonized, which I would love to see, or every country has set up their own emissions trading system or carbon pricing system. That’s the ultimate goal. I would be very happy that, even as a rapporteur of the legislation, I’m more than happy to throw it in the bin, that it became redundant because it’s not needed. We are already living in a totally different world. That’s seriously something I would love to see.

Until then, we want to acknowledge existing systems that are out there. When you are producing in, let’s say the State of California, there is a cap-and-trade system there, so we want to deduct the price that you paid on the carbon in California from the price that you need to pay in Europe. We don’t want you to pay twice. We want to incentivize countries to set up their own system because at the end of the day, it’s a climate measure. It’s not a revenue measure, or it’s not an income-generating measure. It’s all about making sure and understanding that if you take climate change seriously, if you are ambitious to decarbonize, you have to make sure that other countries, other producers outside your jurisdiction also follow and be as ambitious. And of course it would be silly to not acknowledge and not incentivize systems that are already there, that are working. Of course we hope at some point they will converge their price to European levels, and then they don’t have to pay at all to the EU.

Stone: That’s a very interesting point. So a convergence to the European carbon price? The European carbon price becomes almost a standard here.

Chahim: I hope that they will surpass us, and that we’ll need to start paying a carbon tariff when exporting to the US. I have no issue with that. What is important is that we have instruments that work. And again, the emissions trading system is — and maybe people will not believe me, but then please do your research and ask other professors and researchers worldwide — the cap-and-trade system, the emissions trading system is one of the best ways to decarbonize. It’s very efficient and works well. Why? Because pricing works well. I think if others would use it and see historically what we achieved with this instrument, that you basically create the framework under which the market organizes itself how to make certain processes more pricey than others. It gets rid of inefficiency, and it works. So if others would apply it, we would not only welcome it, we want to stimulate it and hopefully together, help this global decarbonization. If you take climate change seriously, and we’ve seen the extreme weather events, we’ve seen the effects in communities. We’ve seen the wildfires, the droughts, the floods. I want to keep the 1.5 degrees within reach. The Paris Agreement is a little over ten years old, and we’re still having the discussions year after year.

Now we have a very efficient instrument. That instrument does not forbid anything. The instrument price is based on what the market is going to do, but it does regulate the total emissions that we think should be limited if you take this 1.5 degree seriously. Most countries have pledged to the Paris Agreement, but not all are working with instruments that get them in the exact direction and course towards this 1.5 degree.

Stone: There seems to be an assumption, at least from the reading and the research I’ve done prior to this conversation, that the CBAM will be WTO-compliant, compliant with the World Trade Organization, yet the WTO has not ruled on anything related to CBAM at this point. Is there any concern at this point that trade issues may come up around the implementation of this?

Chahim: I am quite confident that is not the case because, again, we’ve really in detail — that’s what legal lawyers looked at how to get it and word it, and also what our intention is. The carbon intensity decrease and the Paris Agreement is something we take very seriously, but at the same time, we believe in the rule of law. We believe in the legislative brand and also in the multilateralism and the organizations like the WTO.

So if a country wants to challenge us or a region wants to challenge us, I would say do, because any clarity on this will only be beneficial for all. But I’m quite confident that we will not be corrected by the WTO. Why? Because our producers already have been paying this for 15 years. People tend to forget that, and we are now leveling the playing field in between European producers and non-European producers.

Let me give you one example. Do you think it’s fair that a steel company in the Netherlands, for the last 15 years has been paying a quite significant price for the production of their steel, while the same plate of steel can be imported from China without this tax? How is that fair? And again, we have been asking our producers who, by the way, are quite big fans of this instrument. The market loves this instrument. Industry really would like to have things done because the market itself decides the pricing, decides how fast it should go. But I don’t think people understand that we have been asking our producers for 15 years to contribute. There has been an unlevel playing field for 15 years, and now we’ve said, “Okay, it’s done. We need to act. We need to accelerate, to show more ambition. You are more than welcome to sell your products here, but we will treat you like we have been treating our producers for the last 15 years.” So if that’s discrimination, if that’s unfair, then I really don’t understand what “fair” is.

Stone: The impact on US industry looks to be small. Just 3% of US exports to the EU will be CBAM-eligible. What might the estimated value, if you know, of the CBAM fee on US goods be? How significant? I’m sure you’ve looked at some of those numbers.

Chahim: It’s certainly limited, also because of the scope. The current scope is not the sorts of sectors that we’ve talked about — hydrogen, steel, cement, electricity. There is no cable, as far as I checked, Atlantic Cable that said that we used to export or import electricity. So the current sectors, the current goods commodities, those are not heavily traded with the US. I can imagine that, looking at the future, that hydrogen will be something that will definitely be traded more frequently with the US; although I believe that that hydrogen from the US will be green. So having this levy for non-green hydrogen would only create much more opportunities for American firms, especially looking at the IRA.

At the same time, this levy — and maybe it’s counterintuitive for many Americans — could create more market possibilities for the US because I think, yes, there will be a levy at the border, but this market excess levy will be higher for higher-polluting economies. I believe that the American economy is, from a carbon perspective, cleaner than many other big global economies. So it could already have a positive effect of trade flows, contrary to what people would think that this levy would negatively affect trade flows. It’s not a tariff on the value of a commodity. It’s a tariff on the CO2 content of the commodity. So if you are a cleaner economy, if you are an economy that produces with the latest technologies, you actually have a benefit. And although there is a levy, it could mean that your market offset would be greater than it is today.

Stone: The political reality in this country is that any type of carbon pricing, at least at a federal level, looks pretty difficult. As you discussed a few minutes ago, one of the expected or hoped-for positive side effects of CBAM is to incentivize other countries to develop their own carbon pricing mechanisms. And it makes a lot of sense, right?

If you’re a country that’s exporting to the EU, why don’t you go ahead and take that carbon fee, instead of giving it to the EU, basically? What’s going on here? But again, the reality here seems to be quite difficult. There have been some proposals here in Congress for something similar to CBAM, or a border adjustment. Sheldon Whitehouse, who has been on this podcast before, a senator from Rhode Island, talked about his plan. Bill Cassidy from Louisiana has a similar plan, but it doesn’t have the domestic carbon price that would go along with it. It would just be a price on import, as I understand. What do you view as the response in countries like the United States, where carbon pricing is a very political and difficult issue?

Chahim: First of all, Sheldon Whitehouse has been very supportive in the last years. To me personally, I really appreciate his approach, and also his work in the US to see where the carbon pricing can become realistic. I believe that, at some point, it will be the norm in every country. China has it. There are many, many states that are either introduced to it or are considering it. The UK, Turkey, Morocco, Canada, Australia, and Brazil are thinking about it. The number of countries that see that this is one of the best ways to create a level playing field, for basically protecting your own green investments and at the same time saving climate. It’s also justifiable.

What I see here in the US is that one part of the equation has support, basically, “Let’s price pollution coming from outside the US.” Therefore I think Bill Cassidy has introduced his bill with Senator Graham, the Foreign Pollution Fee. I think it’s a first good step. There’s nothing bad about doing that. I think it’s very good. I think it’s very supportive. It’s basically a CBAM without the federal carbon tax.

Stone: And with potential WTO implications, as well.

Chahim: It could be, but at the same time, if you justify this instrument by looking at the carbon content of goods, I think it can be justified. So I’m not against it. I see it as a supportive instrument. But you will not be exempted from the European CBAM because that requires that your own producers, when they start exporting, need to pay for the carbon content. So I hope that they will also look at this part of the equation and hopefully, in the long run, think about introducing their own carbon price. Companies that have significantly invested in green tech — and I can tell you that five years ago, Europe was maybe leading — but Americans have invested significantly through the IRA. I think on some fields, we are lagging behind. There’s a gap, actually, so we are following the US.

The moment you start investing those amounts of money to decarbonize your economy or transport, it becomes very smart to make use of that comparative advantage and monetize it, give it a value. So the more you invest — I think the US is going in the right direction — the more it makes sense to introduce these types of playing fields, to get rid of unfair competition and moreover, polluting unfair competition because whether you pollute in China or in the Netherlands or in Morocco or in Texas or in — and excuse me if I didn’t mention you, or if I did mention you, I apologize sincerely. It doesn’t matter why you pollute. There are no walls you can build against CO2. We will all be affected by it. I think about all the vulnerable communities living near coastal areas, river deltas. Our farmers, who see their yield decreasing year after year, crops being lost. And then people jump into action. Why didn’t we do more? And probably there will be a way to blame people like me, not for the lack of our climate action, but why we didn’t warn people harder, and why didn’t we yell about this harder? There’s always a way to blame progressive politicians like I am, and I’m okay with that, but I am annoyed by the fact that this is a very strong, rational instrument that could help accelerate decarbonization and also competitiveness.

Also in a country like the US, you can really value and monetize your comparative advantage. Once you start calculating the numbers, once you see what the revenues will be of the foreign pollution fee, then I’m very curious if you do not follow up with your own federal carbon tax, because companies will also at some point demand it from their politicians because it will give them an advantage. At the end of the day, not only politicians are transactional, also firms, and they will push and lobby towards that direction.

Stone: That’s the point you’re getting at, that these companies in the United States have invested in making their industries cleaner, so this is another way to monetize that.

Chahim: Yes.

Stone: One of the critiques of CBAM is that it could potentially hit developing countries the most. An example of this, an analysis by the Carnegie Endowment concludes that Mozambique, for example, is one country that would be potentially vulnerable under CBAM. Twenty percent of its exports would be covered. It’s primarily aluminum that it would be exporting. And these developing countries in particular may not have access to the technologies or the capital to invest in technologies to bring their industries up to standard in terms of the carbon efficiency of them. How can the EU address that? How big of an issue, from your perspective, is that?

Chahim: There are two answers to this. One, I think the message should have been that all the revenues that we collect through CBAM should be donated to international climate finance or to adaptation or to help least-developed countries, developing countries, to decarbonize their economy. That’s one. And we are doing our share. We are taking our responsibility, if I’m honest. I don’t want to be arrogant, but Europe has been one of the, let’s say, quite stable donating regions to international climate finance. That’s very important.

Second, I want to be very clear here. The sectors that we are talking about are usually run by quite global players. These are multinationals operating in many countries. If we would exempt developing countries, I’m afraid that they will end up with facilities that are not up-to-date, and that hit will be much bigger than I think now, asking them to pay a levy. These multinationals have the knowledge, have the finances to make these facilities climate-friendly or to decarbonize them.

So giving them an exemption will, at some point, only create a technological lag. I think that’s not showing solidarity at all. It would be better to force these producers to also invest in decarbonization also in these developing countries. At the end of the day, that’s the best for them and for us. But I think we could have framed the revenues in such a way that this signal would have been clearer. But from my position, that’s something I would still encourage the European Union to do, although we invest and we donate significant amounts to climate, to development aid, compared to many other global industrialized countries.

Stone: Would exceptions be a possibility in the cases where there are not multinational companies running this, where there are local industries, for example?

Chahim: Yes, so what we are now doing in this latest revision is we are looking whether small transactions with limited CO2 content, whether we could exempt them from this situation, to what extent that will also exempt smaller producers in developing countries. That’s something that we still have to study, but multinationals with billions of euros in profits, and usually the lack of paying taxes in these countries, should take responsibility and start investing. If they really believe in the future of aluminum in Mozambique, then I think they should because there are many, many reasons to produce there. Also make them ready for the 22nd century. Make them produce using sustainable energy. There is no country in the world where mitigation, basically investing in sustainable energy, does not have a business case. The Netherlands, of all countries in the world, has more solar on rooftops than the whole of Africa. I can tell you that the same solar panel in almost every African country will have a bigger, better business case, a higher yield. That’s basically physics. And then your being a multinational and not investing in solar panels or in wind energy or in whatever, as long as it’s sustainable, is also, I think, not taking your responsibility and not wanting to have a facility for the long run.

Stone: CBAM will level the playing field for European producers vis-a-vis importers, but one of the issues potentially is that European manufacturers will be levied these fees through the ETS. Increasingly they’ll have to pay for the allowances, and their products will be sent overseas, where they will be burdened with these higher costs as EU producers. I think that the EU is looking at possibly having rebates for certain exports, but it has decided not to do that. What are the competitiveness concerns in the global market for products produced in the EU, and how might that be addressed?

Chahim: There are two ways to look at this. One, if you operate in a market that is a global commodity with a global price, I know that margins are very, very narrow and that every cost, additional cost domestically makes their business case complicated, especially for the international market. At the same time, for example, take steel. They export roughly 15% of their steel, and we import 25% of their steel. So the moment we create a level playing field, we could also create a little bit more of, let’s say opportunities within the EU. That’s one.

Second, when we are talking about these allowances, we are also talking about indirect subsidies. The free allowances have been criticized a lot also under the WTO, by countries saying that that’s unfair, and these are basically indirect subsidies, and they are a disadvantage for producers outside the EU. We at least take care of that part of the criticism. Maybe there is a new part of it, but we can take care of that. If we would create an export rebate, so that companies can export CO2-intense goods to the rest of the world, just so that they can compete in that market, I think that would be a very, very bad signal — a bad signal because then we are subsidizing apparently a good that cannot compete globally, with what goal?

Also we would subsidize carbon-intense goods to the rest of the world. Something different is that if we would heavily invest in green technology, green steel, and those goods are relatively more expensive than, let’s say, non-green steel. For that, I can imagine a world that you would do some type of export rebates for the state-of-the-art technologies. The argument is, we subsidize this, and if others in the world buy it, they are also decarbonizing. So then, again, the angle is decarbonization, and that could even, I think, under the WTO be argued, but not in general. So in general, to keep the free allowances for the export part would really significantly jeopardize the integrity of the system and goes against the climate law or bargain we set by decreasing 55% of our CO2 emissions in 2030 and becoming climate-neutral by 2050.

If you are climate-neutral in Europe in 2050 but continue selling combustion cars and non-green steel for the rest of the world, that’s called “resource shuffling.” That’s not, I think, how you should deal with, on the one hand acting and preaching, and then doing something else outside the EU. I don’t think I would like that.

Stone: So CBAM is coming into effect right now at a politically difficult time in the EU. Germany just had its elections, where industrial competitiveness and the economy were key concerns. The Green Party, for example, in Germany saw its share in government fall somewhat. Do you see or do you expect any significant pushback? Or what has the pushback been at this point to the CBAM, to the elimination of the free allowances, which will be phased in over the next decade or so? It’s a particularly vulnerable time in the EU, and do you see pushback potential for this significantly?

Chahim: The honest answer is I do see that it is possible, but at the same time, when you look at the phase-out of the allowances, roughly half of the free allowances will be phased out in 2030, 48.5% if I’m exact. It will start with 2-1/2%, and again 2-1/2%, and then it works its way up to 48.5%. If by 2030 you are not in a situation that you can produce without these free allowances, while we say that we want to be climate-neutral by 2050, I think we will be in a bigger problem than having or not having free allowances. That means that this technological train — people forgot to jump on it. I know already of several plants being built worldwide, where they are producing green ammonia, hydrogen, green steel, all types of products that probably, by 2030, really will be up and running. Whether they will be cost effective, whether they will be good enough to have a good business case, that’s something else. But those technologies need to be in place, CCS, et cetera.

So if by 2030, while again you keep much more than 50% of your existing free allowances for these CBAM sectors. Other sectors will keep everything. There’s not even a phase-out period determined. Then I think we are in big trouble. And yes, you can then probably delay the bankruptcy of some of these companies for a couple of years, but that means we missed this technological jump forward, and I really think that will be a bigger problem than the discussion of having a bit more or a bit less free allowances. That would be a very bad situation to be in in Europe.

I’m for the opposite. I’m for investing significantly in the best technologies by subsidizing the part where there’s no business case, or co-invest in technologies that still do not have the scale that we need them to be, to be more cost-effective. That’s the way I think we should go into this global race of decarbonization. Also I see the Chinese investing significantly. I see the Americans still investing significantly, and that’s where the concern should be, not about free allowances. Free allowances will not save us from this global competitiveness race.

Stone: Mohammed, thank you for talking.

Chahim: Thank you, Andy, for inviting me.

Stone: Today’s guest has been Mohammed Chahim, a member of the European Parliament and its lead negotiator for the EU’s Carbon Border Adjustment Mechanism. If you’re interested in learning more about carbon pricing and its economic trade and climate implications, visit the research page on the Kleinman Center website. Our web address is Kleinmanenergy.upenn.edu.

Thanks for listening to Energy Policy Now, and have a good day.