Japan Should Cooperate Constructively with the EU on CBAM

1. Explanation of CBAM on the EU side

First, the keynote speaker, DG Thomas, and panelist David Boublil, Assistant Director, Energy and Green Taxation Division, CBAM, provided the following explanation of CBAM. (The full presentation document can be accessed from the link below). A recording of the event is also available below the Zoom icon.)

EU presentaion 2023.11.13
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• In July 2023, the leaders of the EU and Japan agreed to deepen discussions on carbon pricing as part of the EU-Japan Green Alliance (Note 1).
• The EU's central policy for decarbonization is the carbon price, or ETS (Emissions Trading Scheme), which covers more than 40% of the EU economy and has been effective in reducing emissions. In this system, the emission cap allocated to each establishment will be gradually lowered.
• CBAM was designed to eliminate carbon leakage (the transfer of domestic production abroad where environmental regulations are less stringent), which would undermine the EU's reduction ambitions. The ETS free quota will gradually be phased out (2026-2034) and CBAM will gradually be phased in.
• CBAM is neither a fiscal nor a trade measure, but a climate measure.
• CBAM was designed to conform to WTO rules, and would not have been proposed if conformity was not ensured from the outset.
• CBAM deducts carbon prices paid in third countries from CBAM obligations. We welcome Japan's commitment to a carbon price through the GX Initiative.
• Japan is an important trading partner of the EU, but CBAM coverage in terms of Japan is almost exclusively limited to the steel sector, which accounts for only 3% of Japan's exports to the EU and only 1.5% of Japan's steel production to the EU.
• CBAM adopted the Implementation Regulation in August 2023 and began the preparatory phase of implementation in October 2023, which is a learning period that will allow for preparation for its full implementation in 2026.
• We plan to promote dialogue with partner countries, including Japan, to specify and finalize the calculation method for CO2 emissions reporting. We want to ensure compatibility with partner countries to the extent possible and simplify the process as much as possible to lighten the burden on overseas operators.
• We would like to learn more about Japan's carbon pricing system and consider how deductions from the CBAM adjustment can be effectively implemented when the system is fully implemented in 2026.
• The information obtained during the transition period will be used to take stock before full implementation in 2026.
• If the CBAM target sectors were to be expanded from the current six sectors, it would be in a limited number of sectors and would be limited to those areas subject to carbon leakage risk in the ETS target sectors, and not all products will be covered. Petrochemicals have already been mentioned as a possible area. Any such expansion would be done in stages starting in 2030.
• The EU and Japan are both members of the OECD Inclusive Forum for Carbon Mitigation Approaches and the G7 Climate Club, and thus we would like to collaborate in expanding the carbon pricing globally .
• We would like to cooperate fully with Japan to ensure transparency so that the CBAM system will be minimally burdensome for Japanese companies.
• Adapting to CBAM may be a challenge, but should be seen as a green market opportunity.

2. Position explanation by Mr. Hatakeyama, Director-General, Industrial Science, Technology and Environment Policy Bureau, METI

The following are the key points of the speech delivered by Mr. Yojiro Hatakeyama, Director-General of the Industrial Science, Technology and Technology and Environment Policy Bureau, Ministry of Economy, Trade and Industry (METI).

• The European Commission is discussing CBAM under the EU-Japan Green Alliance, and we hope that the European Commission will hold discussions with the Japanese business community and government and respond to their comments in both the future operation of CBAM and its institutional design.
• From the perspective of WTO harmonization, it is important to ensure fairness both domestically and internationally so that Japanese firms do not bear an excessive burden compared to EU firms.
• The reporting obligation from October 2023 is a large burden that companies in the EU do not have in terms of the frequency of reporting and detailed reporting in the product case.
• We believe that the reporting burden could be reduced somewhat by utilizing the ISO calculation method or other similar measures.
• Protection of data in reporting is also necessary.
• Japan has also decided to introduce carbon pricing as part of its GX policy and is designing the GX-ETS (to be implemented in FY2026) and GX-Surcharge (to be implemented in FY2028). The goal is to mobilize investment.
• We believe that Japan's policy of steadily producing results will naturally be appropriately evaluated by CBAM.
• Japan and the EU would like to continue constructive discussions under the EU-Japan Green Alliance as reliable partners.

3. Summary of Panel Discussion

The panelists were then joined by Ms. Miki Yanagi, Senior Researcher, Climate Change Group, Environment Unit, Institute of Energy Economics, Japan, and Mr. Toru Ono, Special Advisor, Japan Iron and Steel Federation, for a Q&A session and discussion with the EU officials mentioned above, where I served as a moderator.

First, the EU side responded to the questions and points raised by the Japanese side (Ms. Yanagi, Mr. Ono, the author, and audiences) as follows.

・The EU-ETS measures CO2 emissions on a business site basis, whereas CBAM requires measurement on a product basis, and there is a difference. Thus, would CBAM be contrary to WTO principles?
→ Certainly, ETS and CBAM cover different scopes, but we would like to finalize the methodology so that they will be equivalent by the time of full implementation, through learning during the transition period.

・The International Energy Agency (IEA), commissioned by the G7 has identified five methods for measuring CO2 emissions in the steel industry, including ISO 14404.
→ International standardization is desired by the EU, and we would like to coordinate with ISO14404, IEA, and the OECD Inclusive Forum for Climate Mitigation Approaches, etc. in the operation of CBAM.

・European companies can carry over their free allowances (through banking), so during the period of full implementation after 2026, imported products will have to pay CBAM immediately, while European companies can offset with the carried over free allowances.
→ There will be no more carryover of free quotas, and if there is any misunderstanding on this point, we would like to indicate it later in the data.

・Is there a negative carbon price (subsidy) in return for tax incentives and are there discounted electricity prices in return for ETS for industries in the EU?

・If the carbon price in a third country that is a CBAM product producer is higher than the EU carbon price, do they not receive a refund?

・The transition period is for information gathering, and it seems harsh to penalize violations of reporting requirements during that period.
→ The preparation period is a learning period to get relevant parties to cooperate with the information and data collection, and for that reason, the penalty is only imposed on bad vendors who completely refuse to cooperate.

・Where CBAM reports contain trade secrets, are there any legal measures to prevent their leakage?

・When the certification by a third-party organization is required at the time of full-scale implementation, will only EU-ETS certification organizations be accepted as certification organizations? Will non-EU institutions be allowed to do so?
→ CBAM reporting certification bodies are accredited by the EU authorities in the same way as EU-ETS certification bodies, and there is no discrimination based on nationality. In fact, many of these bodies operate globally beyond the EU and are available in Japan as well.

・Will the expansion of sectors covered and the inclusion of downstream products cause significant trade disruption?
・To what extent will the target sectors be expanded (non-ferrous metals, automobiles, batteries, ammonia other than fertilizers, agriculture, etc.)?
→ The only specific candidate for expansion is petrochemicals, and even if that is included, it would be after 2030. We are not considering targeting complex products such as downstream automobiles or batteries. It is difficult to say anything about nonferrous metals, as they are still under consideration. Ammonia is subject to CBAM regardless of use. The agricultural sector will not be considered.

・Are carbon credits associated with CBAM products not offset/deducted from the CBAM adjustment?
→ The treatment of credits is under consideration. We will see how credible the credits system is for emission-reduction purposes.

・Are the ETS and fossil fuel levy under Japan's GX policy deducted from CBAM as equivalent to the EU system?
→ We have just heard about the details of the system from METI and understand that the GX system will be designed in detail in the future. We would like to hold a dialogue and scrutinize the system thoroughly within the next two years to see if deductions from CBAM will be appropriate. A bilateral agreement will be reached in late 2025.

・What is the status of your dialogue with other trade partners, especially with the U.S.?
→ We are transparent in our dialogue. This dialogue tour will begin in Japan and then visit Korea and China. I assume that the tone will gradually become harsher. In relation to the U.S., we are discussing the GSA (Global Arrangement on Sustainable Steel and Aluminum) and are aiming for a resolution by the end of 2023, but this has not yet been resolved. (Note: The U.S. has imposed tariffs on steel and aluminum imports for national security reasons since the Trump administration and is seeking to conclude a new GSA with the EU to eliminate them. The EU’s CBAM and the U.S. GSA are in a competing relationship, so to speak).

・What about indirect emissions of Scope 2?
→ We are looking into the possibility of covering all indirect emissions as well. Private power generation also needs to be considered. (Note: For the five sectors other than electricity, reporting of direct and indirect emissions is mandatory during the transition period, but only direct emissions are covered for iron, aluminum, and hydrogen during the full implementation period).

・The European Commission also responds to consultations from companies, but what about the Japanese government?
→ (Comment from Mr. Takahama, Director of Global Environment Office, METI) JETRO will provide consultation not only from Japan but also from Turkey, for example. METI will also work together as a Green Alliance member.

4. impressions

After listening to the above discussion, my impressions are as follows.

My first impression is that the EU is confident in its carbon pricing policy, which is the basis for the CBAM system, and intends to expand it globally to lead global climate initiatives. CBAM is a controversial institution, but in terms of carbon pricing, the EU is playing a leadership role in this system and in the climate commitments of the world. This is a great example of a climate policy leader. I cannot help but admire this ambition to compete with the world's major countries.

Second, I felt that the EU side is very dependent on Japan. While there has been a critical response to the CBAM system from global trading partners, enforcement of the preparatory phase has just begun. The EU would like to gain support from its global trading partners for the CBAM system, which is part of the carbon pricing system as a climate policy. In this context, the EU has strong expectations for Japan, as it was the first to agree on a Green Alliance with Japan. DG Thomas' mission to the Far East is also scheduled to visit Japan, Korea, and China, with China being the hard-liner, probably in an effort to strengthen relations with Japan in the first place. Also, the EU has not come to agreement with the U.S. on CBAM-related issues. During the exchange, the EU side listened sincerely to the issues raised by the Japanese side, and promised to improve the system before full implementation in 2026.

Third, the operation of the CBAM system is still in the process of preparation, and it appears that the detailed design of the system will be decided through ongoing dialogue with internal and external parties toward full implementation in the future. Japanese policymakers are not familiar with this kind of iterative policy making and enforcement process. The Japanese side has responded that it is not appropriate to impose penalties at the beginning of enforcement (for violations of reporting obligations) despite it being in the preparatory stage when the details of the system have not even been decided (it is pointed out that there are many unclear parts even in the implementing regulations published in August, 2023). Although there remain differences in understanding, I would like to pay tribute to the EU officials who were the first in the world to introduce this type of CBAM system (the aims and objectives of which should be supported), which perhaps could be rightly referred to as an exciting policy startup effort should be called a policy venture. Japan is currently in the process of designing a GX system, and the EU's CBAM and ETS systems may serve as a useful reference in terms of both content and process.

Finally, in response to the EU-Japan Green Alliance, Japan should cooperate to ensure that the CBAM system is appropriately accepted by relevant parties, and ensure compatibility and equivalence with the CBAM system, including in the design of Japan's GX policy, while paying attention to avoid any negative impact on Japanese industry. The EU also hopes its trading partners will have frank and constructive dialogue with the EU side, as occurred here, and such a relationship is what the EU-Japan Green Alliance is aiming for. Although the Japanese side was in the position to provide opinions on the EU's CBAM on this occasion, it would also be beneficial for Japan to exchange opinions with the EU on the detailed design of the ETS and levy system for Japan's GX policy in the coming years. Of course, even if Japan aims for policy synchronization it will be necessary for Japan and Europe to pursue different pathways in light of each party's circumstances, while sharing the goal of decarbonization. Demonstrating a reliance on various pathways will be important for maintaining the confidence of Asian countries toward the common goal of Net Zero.

Note: The portions of the text relating to the statements of each person are based on the author's understanding.