The EU leads on climate change – again

The new EU climate change package sets the pace for others to try to match in the run-up to COP26. It has a central architecture, built around carbon pricing. The two key components are the widening of the scope of the EUETS to bring in other sectors, and the carbon border adjustment mechanism (CBAM). After a shaky start to carbon pricing, the EU has now made it the central game in town, gradually bringing in transport, including aviation and shipping, and signalling to other sectors that they, too, will feel the forces of its carbon price in due course. The CBAM is a radical step forward to make this internal carbon price common to both domestic production and imports. In the process, it deals with the competitiveness issues, gives carbon consumption the central role, and creates the scope for a globalisation of carbon pricing through a coalition of the willing. Importers can either pay the CBAM price to the European Commission, or they can introduce a comparable price in their own countries and pay their own governments. There is one more reason for optimism: the revenues from the CBAM are hypothecated to the recovery budget, and will be key own-revenues to the Commission. As always in environmental policy, it is wise to follow the money.