Letter | Date: 02/03/2022 | Ministry of Finance
Recipient: Vice-President Timmermans
Our ref.: 21/1568
Norway and the EU have a strong relationship, sharing common fundamental values and a common regulatory framework through the European Economic Area (EEA). We are partners and cooperate to fulfil common climate targets.
CBAM will impact Norway and other EEA EFTA States as participants in the Internal Market and the EU ETS. Norway supports the intentions and objectives of the CBAM regulation. CBAM should contribute to meeting climate goals in Europe as well as globally.
The following perspectives of the Norwegian Government on certain aspects of a CBAM mechanism, could be highlighted:
- Norway shares the view that a price on carbon emissions is the most cost-efficient way to reduce emissions. We have an ambitious carbon price policy nationally, in parallel with being part of EU ETS.
- We share the objective of reducing the risk of carbon leakage to countries outside the Internal Market by developing more efficient instruments, such as a CBAM. There is a risk that ambitious climate policies in the EU may lead to the relocation of production, which would imply that a reduction of emissions in Europe would not result in an equivalent reduction in global emissions. With recent increases in the price of allowances in the ETS, the risk of such leakage is increasing.
- Existing measures could be said to have certain drawbacks. Key features of the EU ETS directives, with a certain level of free allowances, as well as the framework for compensation of indirect CO2-costs, to exposed industries are implemented to reduce the risk of carbon leakage.
- As has been pointed out by certain industries, there is also a risk that replacing existing measures with a CBAM may increase the production costs for European export industries as well as industries using goods covered by CBAM as intermediary goods in the production of more advanced products. We have noted that free allocation of allowances most likely would need to be phased out to ensure compliance with the WTO Agreement. The challenge will be to ensure that our efforts to reduce emissions in Europe will result in a significant reduction in global emissions, and not a relocation of emissions to other jurisdictions.
- We believe that CBAM will be most effective if it is met with wide acceptance internationally, especially from partners that work closely with the EU to achieve shared climate objectives. Ensuring compliance with the WTO Agreement is crucial to this end and is also of the greatest importance to open economies with trade volumes constituting large shares of GDP. In our view, further steps to strengthen the appeal and relevance of the instrument to international partners should be considered. For instance, other climate policy instruments than explicit carbon pricing could be considered as a basis for reducing the number of certificates to be surrendered upon importation. Drawing on international work on quantifying the cost of different types of climate policies, such as the OECD ambition of an Inclusive Framework on Carbon Pricing, could help alleviate the practical and technical challenges of including indirect carbon pricing measures or other forms of regulation.
- We believe it is important that the introduction and implementation of CBAM does sufficiently allow for experience gained and necessary learning to be taken into account. This is particularly important for refined products dependent on complex value chains. The European Green Deal is both a climate and growth strategy. It is about creating a re-structured and green economy, whereby industry, transport, agriculture etc. move society towards a state of prosperity and sustainability combined. We share the commissions view that indirect emissions from electricity production should not be included in the mechanism from the start.
- However, if indirect emissions from electricity production are included in CBAM from the beginning, the way in which they are calculated will be very important. The ETS has a significant effect on the price of electricity for all European industry, whether an industrial plant is powered by electricity produced from a renewable energy source or from fossil fuels. Replicating these conditions for third countries exporting into the Internal Market would in our view help prevent carbon leakage. Norway will contribute to developing a method on how to calculate indirect emissions from electricity production, and will come back to this matter when relevant. There is a risk that if CBAM allows companies outside the Internal Market to base their calculation of indirect emissions on the carbon intensity in the power delivered specifically to their production facilities. This could incentivize an increase in imports of existing renewable-based products (offset by a reduction in imports of fossil-based products), instead of incentivizing an increase of production based on renewable energy globally.
- On the issue of administration, one could make the observation that a separate CBAM authority in every member state could lead to significant administrative burdens on companies outside the Internal Market wishing to export to several European countries. The administrative burdens caused by the organization of the authority could also potentially affecting the question of WTO compatibility. Likewise, economies of scale may suggest that close consideration could be given to the establishment of a central CBAM authority, with close and necessary links to national organizations, as a potentially more efficient solution.
We need to transform industry, energy production and all other sectors to reach our common objectives. The challenge is to lay down a feasible practical and regulatory foundation to facilitate and ensure a successful green transformation.
Trygve Slagsvold Vedum
Minister of Finance