Rexecode, a pro-business institute, has criticized the carbon market reform in Europe, which was definitively adopted by the European Parliament on April 18th. Rexecode stated that the mechanism of carbon border adjustment, along with the gradual disappearance of free carbon quotas, will negatively impact the competitiveness of European businesses, thus threatening the expected reshoring in Europe. The potential negative impact of such reform is due to the fact that European companies will face higher costs while their competitors outside Europe do not suffer from the same burden of carbon pricing. The reform aims to encourage the European industry to reduce CO2 emissions and introduces a “compensation” scheme for imports in six carbon-intensive sectors and some transformed products. The compensation mechanism intends to protect European producers who have invested in decarbonization from competitors who have not made the same effort. However, Rexecode analyzed the customs data to see how the reform would affect French companies, concluding that only 1.2% of imports in value in France would be affected, amounting to potentially 7 billion euros subject to compensation.
Nonetheless, the other part of the reform, the elimination of free carbon quotas, would significantly penalize businesses and affect their operating accounts. According to Rexecode’s calculations, free quotas represent approximately 45 billion euros per year in Europe and 4 billion euros in France. Removing these quotas will affect the accounts of companies in certain industries, such as the steel sector, which will face costs from pricing CO2. If steel companies fully pass on the costs of CO2 to the prices of steel, the steel prices will increase by about 20%. The impact of such an increase on companies that use steel in their production would result in a decrease in their value-added of 2% to 7.4%, which is often equivalent to about half of their margin. Additionally, Rexecode noted the potential loss of competitiveness for European companies in exports since the costs of decarbonization will raise their product prices. The effects of the reform will be monitored during the observation period to determine its impact. The reform is set to go into effect in October 2023 and will be phased in until January 2026.
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