A week in Brussels, Deforestation, EU Carbon Border Measure, Latest news, SSAfrica, Steel

Week in Brussels: South Africa hit by steel safeguard, CBAM and ETS, deforestation products

The latest in EU trade policy news: new restrictions on steel from South Africa and MEP calls to restrict more product trade linked to deforestation and give industries a free pass – at least for a time – as CBAM gets rolled out. By Rob Francis and Iana Dreyer.

South Africa to be hit by EU steel safeguard

The EU is yet again tightening the noose around steel imports. The European Commission has revised its steel import safeguard this week and is proposing to include South African imports into the scope of the regulation.

The steel import safeguard was initially introduced in 2018 following the US administration’s decision back then to restrict imports of steel and aluminium for purported national security reasons.

The official aim in Brussels back then was to avoid the EU steel market from being flooded by excess capacity on global markets that was being diverted away from the United States.

The safeguard includes a global, or general-purpose cap on imports, and country-specific quotas, which are designed on the basis of recent import data.

Developing countries with less than 3% market share are exempted from the regulation, as are participants in some EU trading arrangements.

Yet as a protectionist measure goes, once it is in place, it takes on a life of its own. The EU’s safeguard was extended for three years in 2021 – a first in any EU safeguard history.

This week’s revision concerns countries that are parties to Economic Partnership Agreements with the EU, i.e. mostly African and a few Caribbean countries – the latter not being relevant in the steel industry anyway.

The draft regulation under circulation states that imports of “certain EPA countries” under the period covered by the safeguard measures had increased by 18.88% for three product categories. The commission does not specify which EPA countries it includes in the calculation.

But the Brussels authority then goes out to single out South Africa – sub-Saharan Africa’s only meaningful industrial country – steel for inclusion into the fold of the regulation.

So, henceforth, South Africa’s exports of ‘stainless hot rolled sheets and strips’, ‘stainless cold rolled sheets and strips”,  and ‘stainless hot rolled quarto plates ‘, will be subject to an import quota.

The steel safeguard is due to expire in 2024 – if it is not extended again.

MEPs want rubber, products with palm oil into deforestation product ban regulation

Thursday (21 April) was the deadline for MEPs in the environment committee to submit amendments to the draft report published by Luxembourg EPP member Christophe Hansen on the European Commission’s proposal to restrict imports of products associated with deforestation and forest degradation.

The proposal includes in the scope products derived from cattle such as beef and leather, cocoa, coffee, palm oil, soy, and wood, and products in which they are found such as chocolate and furniture.

Hansen wants rubber to also be included from the get-go, as well as products derived from palm oil-based products such as cosmetics. At the review stage after two years, he also wants other meat, processed beef, sugar cane and charcoal to also be assessed for inclusion.

The rapporteur is also calling for different traceability rules to be established for each commodity as well as segregated supply chains.

“For many commodities, operators share supply chain infrastructures,” Hansen explains in his report.

“That means that trucks pick up commodities from different regions (deforestation free and non-deforestation free), mix those commodities in storages or mills where they are then transported to ships in mixed tanks that can supply several continents.”

“Under the current rules, it would not be possible for each product to be traced back to an individual smallholder parcel,” he writes.

Hansen says the Commission should “analyse the different supply chains and establish rules on due diligence requirements, traceability tools and liability rules for the different supply chains that are covered by this regulation”.

The Luxembourger also suggests that downstream small-and-medium-sized companies should not have to carry out due diligence once the product in question is on the EU market and proposes to simplify the commission’s planned benchmarking system from three tiers to two.

“Assigning countries a high-risk category might be challenged by the country concerned before the WTO,” Hansen said.

“While a high-risk assessment does not automatically lead to a ban for commodities from these countries, the increased due diligence criteria might deter companies from maintaining supply chains from high-risk countries.”

Definitions within this proposal are proving to be highly contentious in the council discussions to date. Hansen concurs to a degree, proposing to delete the definition for “sustainable harvesting operations” on the basis there is no internationally agreed definition.

Other political groups will put forward further amendments to increase the scope of both products and ecosystems, with maize and savannah regularly cited as being wrongly absent from the proposal.

Parliamentarians from the left will also likely aim to strengthen provisions around human rights, and specifically the rights of indigenous peoples, as well as make the due diligence process more stringent.

Those on the centre right are more cautious and want to prevent trade tensions with trade partners, also with an eye on rising food prices resulting from the invasion of Ukraine. Hansen himself stated that he had not proposed expanding the scope of products to maize precisely because of the “delicate geopolitical situation”.

Discussions on this file will continue in both the council and parliament, with a vote in committee due in the coming months. Member states will likely reach a consensus in council under the Czech presidency which begins on 1 July.

CBAM and free ETS allowances: an MEP vote indicates both could coexist for a time

On Wednesday (20 April) the European Parliament’s industry committee voted to launch the EU’s planned carbon border adjustment mechanism in 2027, but also postpone the start of the phase out of free allowances of emissions from 2028 at the earliest, rather than 2026 as stated in the commission proposal.

This means that CBAM and free allowances would co-exist, at least for one year. In many eyes this would amount to double protection and would be a clear breach of WTO rules, but some industry lawyers think otherwise.

The industry committee is one of several committees which can adopt opinions on the CBAM. These opinions are then forwarded to the environment committee which will vote on the various amendments next month.

Even the 2027 date for phase out of free allocations put forward by the committee is dependent on the commission carrying out a “thorough analysis and simulation” to ensure that the CBAM can indeed “prevent the risk of carbon leakage both for imports into or exports from the customs territory of the Union, maintaining EU ETS free allowances until it has proven such effectiveness”.

As the opinion states: “A comprehensive transitional period shall be established from 1 January 2027 to 31 December 2027. The Commission shall establish a framework by which to ensure that the measures applied during that period comply with the WTO rules.”

Elsewhere parliamentarians in the industry committee strengthened the provisions around preventing circumvention and suggested non-pricing policies may also have a role to play, contrary to the commission proposal and the draft report published by the lead MEP in the environment committee Mohammed Chahim.

“The Union may pursue complementary approaches to CBAM through cooperation and dialogue with third countries,” states the ITRE opinion, “with a view to conclude agreements on open, multilateral and cooperative approaches to tackle carbon leakage and achieve the deep decarbonisation of energy intensive industries, including through non-pricing policies”.

The opinion as adopted would also oblige the commission to present a report on the issue of “export credits”, which is so far being avoided by Chahim but is gaining traction in the member states and seems to have the support of business-friendly MEPs.

This report should “assess the risk of EU exports on global markets being replaced by more carbon intensive goods or by goods that are not subject to equivalent carbon costs. The Commission report should be accompanied by a legislative proposal to develop WTO compatible solutions such as export adjustments mechanisms to be implemented to avoid carbon leakage on European exports, while preserving emission reduction targets.”

This position will now be forwarded to the environment committee which will vote on the parliament’s definitive position on 11/12 May. The council reached a partial common position on the CBAM in March.

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