Research Report
Carbon Border Adjustment Mechanism of the EU and Korea'sLegal and Policy Responses to the New System
Ⅰ. Purposes and Methods of the Study
▶ Backgrounds and Purposes
○ Backgrounds
- As could be inferred from the term ‘border adjustment’, conflicts of interest caused by implementation of carbon reduction policies seem unavoidable issues within the European Union.
- To deal with issues over the carbon border adjustment mechanism, it is necessary for the EU to reconcile conflicts among member countries, and institutionalize and finalize ‘carbon border adjustment’ in their own way, In addition, the analysis of the process of resolving conflicts of interest could give implications to the EU carbon border adjustment system which is planned to implement in the near future.
○ Purposes
- This study closely examines the establishment process of the EU carbon border adjustment mechanism and predicts future legal and policy changes in subjective industries. It also aims to find a legal and policy response plan in Korea to respond to the implementation of the carbon border adjustment system.
▶ Scope of the Study
○ Scope of the Study
- This study looks into the consultation process to establish the carbon border adjustment system rather than whether the European Union's carbon border adjustment system conforms to the WTO regulations under the international trade law. By reviewing the consultation process, this study provides how the mechanism will be established in the future in relation to border adjustment, and deals with issues over how Korea should respond to the new system.
Ⅱ. Main Contents
▶ Process of Establishing the EU Carbon Border Adjustment Mechanism
○ Environmental aspects of introducing the carbon border adjustment system
- The European Union aims to meet 55% emission reduction from 50 billion tons to 25 billion tons by 2030 compared to 1990- levels. All 27 EU Member States committed to turning the EU into the first climate neutral continent by 2050. To get there, they pledged to reduce emissions by 100% by 2050, compared to 1990 levels. The European Union well recognizes the need to introduce effective institutional mechanisms to achieve this carbon emission reduction target.
- The European Union should come up with a way to resolve gap in the amount of greenhouse gas emissions among member countries caused by differences in industrial structure and economic development among member countries. In order to achieve the goal of climate neutrality by 2050, there is a high possibility that the EU reorganizes the current Emission Trading System (ETS) and strengthen necessary parts to resolve conflicts of interest in the region.
- Despite its own efforts to cope with climate change and achievement of greenhouse gas emission reduction, the EU has to deal with the global warming problem at the same time as the issue of global warming is not limited to the region but it is a crucial issue to the world. From the European Union's point of view, it seems that there is a need for a system in which countries around the world, including the European Union, can cooperate on climate change issues.
○ Economic aspects of introducing the carbon border adjustment system
- So far, there is no convincing evidence that the EU's climate change response policies are closely related to carbon leakage (a risk that European companies move their carbon emission-producing activities outside the EU in order to take advantage of lower environmental standards). However, there are concerns that the risk of carbon leakage would increase under stricter emission reduction targets such as the plan of carbon neutrality by 2050.
- Such concern is constantly being shown as warnings about the possibility of carbon leakage in the European Council, and member countries request to establish a carbon border adjustment system in a way that could maintain their industrial competitiveness through prevention of carbon leakage.
▶ Process of Introducing the Carbon Border Adjustment System of the EU: procedures
○ Developments and procedures of introducing the new system
- In June 2019, at its annual regular meeting, the European Council asked the European Commission to formulate the conditions, incentives and enabling framework necessary to ensure the implementation of the climate-neutral EU in accordance with the Paris Agreement.
- On December 11, 2019, at the request of the European Council, the European Commission presented the European Green Deal, which are measures to reduce the risk of carbon leakage within the European Union, and other measures in communication 2.1.1
- On July 10, 2020, the Committee on the Environment, Public Health and Food Security (hereinafter referred to as the Environment Committee) drafted its own-initiative reports, titled ‘Towards a WTO-compatible EU carbon adjustment mechanism (2020/2043(INI))’ (2020/2043(INI)).
- On February 15, 2021, the Environmental Committee submitted its final report to the European Parliament. From November to December 2020, opinions from four relevant standing committees were collected and reflected.
- On March 10, 2021, the European Parliament announced a resolution “to establish a carbon border adjustment system in line with WTO regulations.”
- On 14 July 2021, the European Commission adopted a proposal for a new Carbon Border Adjustment Mechanism. The Commission has introduced a package of proposals to enable the European Union's climate, energy, transport and tax policies to achieve a target of reducing net greenhouse gas emissions by 55% by 2030 compared to 1990 levels. As part of the proposal, the commission announced a regulation proposal related to the carbon border adjustment system.
○ Outlook
- The European Commission's proposals should go through the process of deliberation and passage by the European Parliament and the Council of Ministers in accordance with general legislative procedures. As observed during the existing discussion process, the preference of each political group in the European Parliament will be a determinant factor for passage or revision of contents of the regulations. However, considering the fact that most of the potential conflicts have been resolved with the proposal of the Executive Committee, it is expected that the proposal would be passed soon.
▶ Legal and Policy Responses to the EU’s Carbon Border Adjustment System
○ Target industries of the carbon border adjustment system
- With regard to the five industries which are selected as targets of the EU carbon border adjustment system in the current proposal, the EU is South Korea’s sixth largest export market.
- Among those five industries, steel and steel products account for a significant portion of Korea's exports to the EU.
- If the European Union's carbon border adjustment system is applied to products that Korea exports to, it will have the greatest impact on the steel industry in the short term. It is required to take responsive measures accordingly.
- When the EU Commission announced the introduction of a carbon border adjustment mechanism(CBAM) within the European Green Deal, it explained that the organic chemistry field and the oil refining field were inevitably excluded in the proposal due to technical limitations despite the accumulated emissions by those two sectors. In the future, when technological limitations are overcome and emission calculations become possible, the organic chemistry and oil refining sectors might be included in targets of the carbon border adjustment system. Therefore, the Korean government should also prepare countermeasures for those two industries.
○ Emission Trading System and Carbon Border Adjustment System
- (phase-out of free allocation of emission allowances) conflicts over the phase-out of free allocation in the EU Emissions Trading Scheme(ETS) shows each member country’s interest over the implementation of the carbon border adjustment system even within the European Union. The phase-out of the EU ETS free allowance would be helpful for industries in Europe to reduce the burden of carbon emission reductions. Phase-out of free allocation buffers the burden of reducing carbon emission on Korean industries, as the EU is a main export destination to Korea. According to the forecast, the EU ETS free allocation will be gradually phased out from 2026 to 2035, and will be completely abolished from 2036. Currently, the EU ETS and K-ETS are not operated in conjunction, it is necessary for Korea to gradually reduce the amount of free allocation and to respond to the newly introduced system.
- (possibilities of exemption from the carbon border adjustment system) Korea has implemented its own greenhouse gas emission trading system. However, Korea is not exempted from the carbon border adjustment system because the Korean emission trading system is not directly linked with the EU ETS. Research should be conducted to determine which one would be advantageous for Korea to link EU ETS and K-ETS in order to be exempted from the carbon border adjustment or exercise the ‘right to deduct’ at the stage of implementation of CBAM.
- (CBAM Certificates) The new system stipulates that the European Commission is invested with the authority to ‘adopt enforcement laws to further define the methodology for calculating the average price of CBAM certificates and the practical measures for the publication of prices’. Therefore, it is necessary for Korea to closely examine details of the enforcement law and prepare response measures.
Ⅲ. Expected Effects
▶ Prospects and suggestions the study presents regarding future implementation of CBAM would be helpful to come up with responsive measures.