2023 OUTLOOK

TEN COMMENTS TO LOOK AT THE CHALLENGES OF THE NEW YEAR. FOURTH CHAPTER: CLIMATE CHANGE. EUROPE IS THE LARGEST INTERNATIONAL MARKET FOR GREENHOUSE GAS EMISSIONS. IN ADDITION TO GRADUALLY AUCTIONING THE REMAINING 40% OF EMISSION PERMITS, THE CARBON BOARDER ADJUSTMENT MECHANISM (CBAM) IS EXPECTED TO COME INTO EFFECT TO PREVENT CARBON LEAKAGE, I.E., THE TRANSFER OF EMISSIONS TO LESS STRINGENT COUNTRIES

by Valentina Bosetti, Full Professor of Climate Change Economics
Translated by Alex Foti

Like every year, in January the average global temperature recorded for 2022 will be announced. This is obviously a purely formal moment of climate assessment, given that almost every month experienced in 2022 was among the top 5 warmest ever recorded, given the widespread droughts from Europe to Asia to East Africa, and extreme rainfall and various heat waves experienced by various areas of the globe. By now the link is established between extreme weather events and climate change - i.e. the frequency with which they occur cannot be scientifically and statistically explained other than by climate change.

As usual, many, especially young people, will ask themselves: are we going to finally do something about it or are we letting another year go by without putting an end to our greenhouse gas emissions?

Well, 2023 should be the year in which Italy’s Integrated National Energy and Climate Plan (PNIEC, the Italian acronym) should finally be updated to incorporate the most stringent targets for carbon emissions and share of renewables in energy generation in line with the EU’s Fit for 55 policy. The PNIEC it is essential because a key element of the energy transition is planning. Building infrastructure on a national scale and over a very long period of time needs integrated planning between sectors and major national players.
But whatever happens to Italy, however important, will have modest consequences on European and global emissions. For this reason, it is perhaps more important to look at the EU, which constitutes the largest international market for greenhouse gas emissions certificates (covering more than 40% of European CO2 emissions and 10,000 installations) which has made it possible to achieve the desired reduction in carbon emissions, while at the same time giving the flexibility for businesses to do it efficiently. Emission permits, which in the early stages were given for free to all regulated companies, are now being auctioned in 60% of cases. The idea is to gradually auction off the remaining 40% as well.

At the same time, to avoid the risk of carbon leakage (i.e. the risk that there is a "transfer" of production and related emissions towards regions with less stringent industrial regulations and climate policies), the Carbon Border Adjustment Mechanism (CBAM) is expected to come into force. The CBAM is a tool, compatible with the WTO, which requires EU importers of raw materials or goods produced outside Europe and belonging to industries that are subject to emissions markets in Europe, to deposit a certificate for each emission made in producing such goods, the value of which depends on the value of emission permits traded on the European market. Obviously, if emissions have already been taxed in the country of origin, this will be taken into account. We start from five sectors: cement, steel, electricity, aluminum, fertilizers, even if other industries have already been proposed by the European Commission (for example plastics).

The accounting phase should begin in 2023 (CBAM certificates should not actually be paid) to allow companies that trade with Europe in the sectors that will be regulated to learn how to report emissions (otherwise average industry values will be considered).
Delays are expected due to the geopolitical situation and the energy crisis, although it is unlikely that there will be any setbacks on the policy instrument. Also because the auction of 100% of emission permits would make it possible to collect funds for a Europe concerned with equitable ecological transition, which is promoting a social climate fund to finance support for the most vulnerable developing countries.

Finally, given that European emissions are only a small fraction of global emissions, discussions at international negotiating tables will be even more relevant. 2023 is the year of the global “stocktake” — a comprehensive assessment of how countries are reducing their emissions compared to their national plans and how this positions them towards the ultimate goal: keeping the planet from heating more than one and a half degrees. Given that it has become clear that we need to do more and do it faster for the transition, it’s plausible the discussion will move toward policy instruments linked to international trade. CBAM is just one example of this potential, even if the approach is likely to lead to the idea of ​​Climate Alliances: countries that implement similar climate policies benefit from facilitated conditions on trade access.

Again, the impact that international geopolitical conflict may have on these negotiations is not yet clear, but timescales will probably have to be stretched further. Meanwhile, 2023 will be another year of climate records.