German industry worried about EU carbon market reform, skeptical of CBAM

Industry in Germany watched the presentation of the European Commission’s new package of energy and climate laws with bated breath on 14 July, expressing worries about a reform of the EU’s carbon market that could see free CO2 pollution permits terminated by 2036.

The Commission proposal marks the beginning of a long struggle to get legislation approved, as EU states fight for their national interests during negotiations with the European Parliament, a process which usually takes two years.

And the German government is known to have its industry’s interests at heart. The core demand from industry is to maintain the country’s industrial competitiveness in the face of rising carbon prices and avoid international trade frictions caused by the EU’s proposed new external carbon border tariff.

The global push for decarbonisation is both a great challenge and opportunity for German industry, said Peter Altmaier, the German Economy Minister.

“This is the most significant legislative proposal since the single market proposal package by Jacques Delors,” said Altmaier, who spoke to journalists on 15 July.

“Green Tech made in Germany has a great reputation worldwide,” he added. 

Still, German industry is worried about the impact the new rules will have on business.

The plan is ambitious but it is “missing important answers to central questions,” said Sigfried Russwurm, the President of BDI, Germany’s powerful industry association.

“It is not enough just to be a role model for the world,” added Wolfgang Große Entrup, chief executive of VCI, Germany’s chemical industry association, who insisted that the country’s industrial competitiveness must be upheld.

Central to German industry worries is the European Commission’s proposal to introduce an external border tariff, aimed at ensuring that importers of foreign goods are applied the same carbon price as EU manufacturers.

The carbon border levy, the first of its kind worldwide, would apply to six sectors: electricity, iron and steel, aluminium, fertilisers, and cement.

“An EU lab experiment with border taxes is dangerous and already doomed to failure,” warned Entrup, adding that the proposal would fail to protect the exports of European firms to international markets.

Altmaier defended the Commission proposal, which foresees a pilot phase for select product categories like steel, aluminium and cement. Green steel is likely to be 30 to 40% more expensive than regular steel, making it uncompetitive without an instrument like the proposed carbon border adjustment measure (CBAM), said the German Economy Minister.

But industry representatives are sceptical, and expressed preference for the current system where industries receive CO2 pollution credits for free under the EU’s carbon market, the Emissions Trading Scheme (ETS.)

“The border adjustment is still untested and involves considerable risks,” warned Hans Jürgen Kerkhoff, president of the German steel industry association, who bemoaned that free CO2 credits for industry will be “massively melted down” past 2030.

“The proposed CO2 border adjustment only protects companies within the EU and is associated with considerable legal as well as bureaucratic hurdles,” said Peter Adrian, President of DIHK, the German industry social partner.

Adrian joined the chorus of German industrialists calling for the carbon border levy to apply in addition to the free allocation of CO2 pollution permits.

According to the Commission proposal, free allocations will slowly be phased out as the CBAM starts applying. They will then be entirely terminated by the “firm date of 2035,” EU climate chief Frans Timmermans said at a press conference on 14 July, adding that this will give industry a 10-year period to adjust.

German industry is not alone in expressing concerns about CBAM. China too has expressed “grave concern” over the plan, saying it would be “discriminatory” and run against UN principles affirming the historical responsibility of rich nations in causing global warming.

Pascal Lamy, a former Head of the WTO, said the free allocation system combined with the new EU carbon border tariff, risked contravening international trade rules, and warned it may “ultimately lead to a trade war” that would undermine the EU’s climate leadership. 

Another source of worry for German industry is the de facto ban on the manufacturing of new petrol and diesel cars, which the European Commission wants to introduce as of 2035.

But outlawing the internal combustion engine is the wrong answer to decarbonising road transport, warned Russwurm, who said other technologies like hydrogen and low-carbon fuels also merit consideration.

The Commission proposal says new cars built after 1 January 2035 should emit zero CO2, a move critics said will de facto limit car manufacturing to electric vehicles.

“This is hostile to innovation and the opposite of open to technology,” said Hildegard Müller, President of Germany’s auto manufacturer association VDA.

Part suppliers in particular will struggle to transform at the speed mandated by the Commission, resulting in large job losses, she warned.

The car industry is influential in Germany, where is provides jobs to 830,000 people, according to the Federal Bureau of Statistics (Destatis.)

However, the German government’s negotiating position may be eased by domestic car manufacturing giants which have already announced they would stop producing internal combustion engines.

Volkswagen announced it would stop producing diesel and petrol cars by 2035, just days before the Commission unveiled its package, while Audi is looking to stop production of combustion engines as soon as 2033.