Some kind of carbon border adjustment mechanism (CBAM) might therefore be necessary and no strong preferences were expressed for structuring this as a carbon border tax/customs duty, a shadow emissions trading system or a carbon excise tax, although the latter would need to be coupled with some kind of green subsidy to encourage investment in greener production.

While the charge may be levied on some kind of average carbon content of products, accepted certification methods exist which should allow importers to demonstrate the actual embedded carbon content of products so that any CBAM charge could be reduced appropriately. There was support for developed countries providing support for low income developing countries to transition to a green economy

The second roundtable on Carbon Border Adjustment Mechanisms (CBAM) was held on 9 April 2021 with a group of 14 representatives from 10 companies, across three continents. The write up of the first roundtable, held with a group of experts on 9 March 2021, can be accessed here. Participants discussed the impact of carbon pricing and potential effects of a CBAM. While reference was made to the various options for a CBAM, which were set out in the EU Commission’s consultation launched in 2020, the discussion focused on the principles in general. They were not intended solely as a critique of any EC proposals.

Attendees spoke in their private capacity rather than on behalf of any organization. The meeting was held under the Chatham House rule and any attributed comments have been cleared with the speaker.

In some cases, there was general agreement among the participants but on other points there were differing views. This note is not intended as advice and does not necessarily reflect the views of any KPMG firm.


Loek Helderman, Tax Lead for KPMG IMPACT began with a short introduction outlining the

four different propositions for a CBAM referred to in the EU Consultation:

  1. Some kind of Carbon Tax – probably structured as a customs duty;
  2. Extending the existing EU Emissions Trading System (ETS) to include importers – this would create a number of complexities and it was assumed it is not likely this option will be adopted by the EU;
  3. A Shadow ETS, whereby importers would buy allowances from an unlimited pool of shadow or deemed allowances at the prevailing EU ETS allowance price;
  4. A New carbon excise tax – applying both to EU products and imported products.

It is likely that an EU CBAM would apply (at least initially) to industries most at risk from carbon leakage - for instance, steel, aluminium, cement, chemicals. The aim would be to ensure that there is an equivalent carbon cost for imports into the EU in comparison with locally manufactured products.

In feedback to the EC Consultation, business respondents generally preferred Option 1 – i.e. a carbon tax/customs duty. Interestingly, at the first KPMG CBAM roundtable, there appeared to be a preference for Option 4 – i.e. a carbon excise tax.

In considering what form of CBAM the EU might introduce, it is important to recognise that if it were structured as a tax it would require the unanimous consent of all EU Member States. If it was introduced as a non-tax measure – e.g. a shadow ETS – it could be introduced with the less onerous majority voting procedure.

Carbon leakage can occur in various ways. Participants thought that while there was no strong empirical evidence for carbon leakage at present, as CO2 emissions reduction aspirations increased - resulting in an increased carbon price - it was very likely that it could become a significant problem

One participant referred to a carbon leakage “prevention paradox”. There is little empirical evidence of leakage and some argue it is not really a significant issue. However, there is little actual leakage because carbon prices are low and there are already protection measures in place. In the EU, industries which are vulnerable to carbon leakage are issued free allowances based on the emissions produced by the top 10% most efficient facilities in the industry. This means that allowances only need to be purchased to the extent that a facility produces more CO2 than is covered by this benchmark. So the paradox is that the danger of carbon leakage - which a CBAM is designed to address - does not appear to arise precisely because measure have already been taken against it. If the free allowance quota is reduced going forward - as seems likely - the carbon price and pressure for leakage will increase.

Participants pointed out that there are different ways of defining carbon leakage. Various industry association have tried to provide examples and the issue is always to define what sort of leakage is being identified. If it is thought of as, say, a company closing a steel plant in one country and moving it to another due to carbon pricing, that is unlikely to happen. However, leakage can also occur where domestic products are substituted by imports. For example, 15 years ago the EU was a marginal net exporter of steel. Now, the EU is a net importer. While there may be various factors driving this change, it does indicate that carbon leakage is occurring.

As another example, in the chemical industry there are concerns that certain new investments have not gone into the EU but been diverted elsewhere due to the impact of carbon pricing.

There is a tension between having a high cost of carbon for environmental purposes and the impact this can have on the competitiveness of exports

It was agreed that where products are openly traded on the world market there is a concern that increased carbon prices adversely affect exports. This is true, for example, as regards steel and chemicals. It was noted that there is an unavoidable tension between environmental policy and maintaining export competitiveness. If a jurisdiction or region (such as the EU) has high emission reduction aspirations and therefore a high carbon cost, it is bound to impact the competitiveness of exports. This also means that if the EU phases out the free allocation of allowances under the ETS, it could have an impact on competitiveness. If exports are not covered by the carbon price in order to maintain competitiveness it follows that the environmental policy is restricted to the domestic market - in other words adequate carbon pricing would depend upon the price in the country of importation.

Evidence from the EU ETS shows that carbon pricing can be effective in driving emissions reductions. But some participants raised concerns that where abatement technology is not available and costs cannot be passed on to consumers, a carbon price becomes a deadweight and, in particular, can adversely impact exports

One participant asked about the extent of evidence that carbon pricing worked to reduce emissions. It was pointed out that according to the EC the EU ETS has reduced carbon emissions by covered industries by 30% between 2005 and 2018.

Certain industries such as the steel industry have made huge steps in decarbonisation. To go further however it may require new technologies and in the meantime the industry is looking at carbon capture and storage options. However, such developments are expensive and someone has to bear the cost.

There was some discussion about who does and who should incur the cost of carbon tax. Some noted cost should pass through to consumers – so it changes behaviour; structuring the charge as an excise tax or even a VAT could facilitate this. Another participant thought that governments simply assume that markets will do the work and capital will be allocated to the most environmentally friendly technology. Nevertheless, it was pointed out that from a policy perspective it was important to identify who should bear cost so as to structure the tax as efficiently as possible. Even if a carbon cost cannot be passed on, if it incentivises the producer to use greener technology – as that is cheaper than paying the tax – it will result in reduced emissions.

However, it was argued that carbon pricing does not achieve a reduction in CO2 emission where abatement or low carbon alternatives are not available. A real-life example was given within the metal industry in a developing country. The producer is charged the cost of a carbon tax by certain suppliers. As it is not possible to obtain the raw material from a less carbon intensive source, this cost cannot be mitigated by the producer. Furthermore, the producer is not able to pass on the cost to its own customers. There is, therefore, no incentive for the customers to mitigate the cost by reducing the quantity of product used or switching products to less carbon intensive ones. Another participant noted that this is a real issue for small exporting countries; they may lack the market power to pass on the price in exports.

Participants recognised concerns about the impact of applying a CBAM to products from low income developing countries. A possible solution could be developed countries providing financing to assist a green transition in such countries – perhaps financed through recycling the CBAM revenues. Simply exempting imports from a CBAM was not generally favoured

A concern was raised that a CBAM applied by a developed country to imports from a developing country could be seen as protectionism and forcing the cost of decarbonisation onto poorer nations. It was noted that it is often suggested that the revenues from a CBAM should be used for financing the transition to green technology in developing countries rather than being seen as a windfall the importing country. Such destination of revenues could help obtain global acceptance of a CBAM and mitigate trade tensions. Nevertheless, the EU proposals suggest that any tax raised will become an own resource of the EU to finance EU development.

One participant pointed out that there were arguments that developed countries should subsidise the transition to green technology in, say, low income developing countries. However, this should be done at the macro, country to country level. It did not follow that it would be appropriate to provide an exemption from a charge under a CBAM to specific imports from developing countries as this would provide an un-level playing field between companies depending upon the location.

Participants noted that facilities covered by the EU ETS have to measure and certify actual carbon emissions. It should therefore be possible to allow importers to obtain certification of embedded carbon so the CBAM could be calculated on the actual emissions rather than some industry benchmark

There was some discussion about the need and viability of determining embedded carbon emissions in imported products.

It was pointed out that if a charge was levied on some average carbon content of a product, while the charging mechanism would be simplified, there would be no incentive for overseas producers to reduce emissions. It would therefore be more effective to allow importers to demonstrate the actual embedded carbon in products so that if it was lower than the benchmark the tax would be accordingly reduced. In the EU it is necessary for industries covered by the ETS to determine their carbon emissions which are then certified by third parties. It should therefore be possible, and desirable, for importers to be given the opportunity to do the same.

Nevertheless, it was noted that for some products it is possible to establish the carbon footprint with a very high degree of accuracy but for others it may be necessary to use some kind of global or local benchmark and so better ways to measure the carbon content is needed in some cases.

It was noted that the EU Consultation document proposed that a CBAM would cover both Scope 1 Emissions (i.e. direct, produced by the facility itself) and Scope 2 Emissions (i.e. indirect but owned – such as emissions arising from purchased electricity and heat) but not Scope 3 Emissions (i.e. indirect, not owned, emissions generated within the value chain). While no concerns were raised about measuring Scope 1 Emissions some participants noted measuring Scope 2 was much harder and could complicate a CBAM

The EU ETS only applies to Scope 1 emissions but in practice this should not lead to discrimination – which could be contrary to World Trade Organisation (WTO) rules. Assume that a steel plant in the EU is using electricity which is not produced by renewable power such as wind. The facility producing electricity would also be subject to the ETS. The plant producing steel would be subject to the ETS in respect of its own direct emissions but not the indirect emissions from the electricity - as these would already have been subject to the ETS. In practice therefore both the Scope 1 and Scope 2 emissions associated with the steel would have been subject to the ETS which means that if imported steel was also subject to a charge on both types of emissions the situation will be comparable.

One participant pointed out that while they are able to measure their own Scope 1 emissions it is difficult for them to measure the Scope 2 emissions. This could create a practical difficulty in applying a CBAM.

The question was raised whether or not an EU CBAM would also apply to Scope 3 emissions The EU Consultation does not extend that far although the European Parliament has suggested that Scope 3 should be included. Another participant pointed out that some businesses already do attempt to measure Scope 3 emissions as part of their own net zero strategy - although this is different from the base which is currently subject to carbon pricing in the EU. To reach such targets business need to have insight into their total carbon footprint and change the way they operated. Furthermore, if a government’s ultimate goal is to arrive at decarbonisation it could be necessary for Scope 3 emissions to be measured and included in any carbon regime. It would then be necessary to ensure there was relief for any other carbon tax paid in the supply chain to ensure there was no double charging.

Several other participants noted that measuring Scope 3 emissions in industries such as the chemical or extractive industry would be very difficult. Another pointed out that many businesses have made net zero commitments and know they need to move faster but are struggling to find ways to do so.

The participants did not raise any major concerns about the application of one of the possible CBAM options as opposed to the others - although each has flaws. Nevertheless, during the conversation it was assumed that the viable options were a carbon tax/customs duty, a shadow ETS, or a carbon excise tax as opposed to simply extending the EU ETS to importers. It was generally thought that a carbon excise tax would need to be combined with some kind of subsidy to incentivise green production

It was noted that a carbon tax/customs duty and a shadow ETS automatically incentivise green production whereas an excise tax does not. Therefore, the latter would have to be combined with some kind of subsidy which would be paid to producers where their carbon emissions were lower than the benchmark at which the duty was set. While technically they would be separate instruments, the net effect of the excise duty and the subsidy would be similar to a carbon tax on the embedded carbon content of the product. One participant thought this would work if the excise tax was applied at the top of the value chain - for example to steel, aluminium, cement and chemicals - but it would become too complicated if it was applied lower down the value chain to derivative products.

Another participant noted that subsidies or refunds can be the subject of fraud. He noted this is a serious issue with VAT refunds. Therefore, any subsidy system would require a tight system of certification control to avoid abuse. Furthermore, even non-fraudulent taxpayers may have issues with the integrity of their data which could lead to additional errors in subsidies or refunds.

While participants accepted it is likely that free allowances under the EU ETS would be reduced over time, it was considered it would be possible for them to be continued for a transition period while a CBAM was in operation

If the EU adopts a shadow ETS it raises the question whether or not free allowances should be continued. If an importer had to purchase and surrender shadow allowances at the prevailing ETS allowance price it would be disadvantaged in comparison with an EU-based competitor which received some allowances for free and this could breach The WTO rules.

One participant noted that what is important is that EU producers are not given double protection i.e. benefiting from the allowances while competitor products are subject to a full CBAM. One way to address this might be for the charge under a CBAM to be initially set at the average cost of carbon in the EU - i.e. taking account the impact of any free allowances - rather than at the prevailing price of an allowance traded in the market. There may be an administrative burden for importers if they wished to demonstrate a product had lower than average emissions and should be charged at a lower rate – but that would be their decision and would be in their interest. As free allowances were reduced over time the price could be increased until it eventually matched the full ETS allowance market price.

Participants generally thought we need cooperation, not CBAM. Ideally the best approach would be some kind of global agreement on a minimum carbon price – perhaps only amongst the largest CO2 producing nations – it was generally thought this could be very difficult. If countries or regions were to unilaterally increase their emissions reductions ambition, this did point to the need for some kind of CBAM to address carbon leakage

There was general agreement that rather than countries imposing CBAMs it would be better if there could be a global agreement on a minimum carbon price. Given that the majority of global emissions are produced by a few major economies it could be sufficient for these countries to reach an agreement under some kind of carbon club. It was suggested that maybe the threat of the spread of CBAMs would drive such cooperation. However, one participant pointed out that these major economies all have very different interests and so reaching an international consensus could be very difficult.

Another participant noted that given the difficulties in agreeing an appropriate carbon price some stakeholders are starting to think more about alternative nature-based solutions and carbon capture and storage. It was pointed out though that such technologies are still largely in their infancy. An example was given of green hydrogen (i.e. hydrogen produced from electrolysing water using renewable power); while it is technically possible it has been estimated that it would take 30% of the entire wind power of the Netherlands to produce enough green hydrogen for one steel plant located there.

Participants recognised that that transition to a carbon neutral economy is very difficult. If countries are to increase carbon reduction ambitions, there is likely to be a need for an increased carbon price. If only certain countries or regions take this step there will be a severe risk of carbon leakage and loss of competitiveness in exports leading to unacceptable economic consequences. There is therefore a need for a correction mechanism of some sort such as a CBAM.

To view the briefing note related to this roundtable, please click here.