Ladies and gentlemen,

I have been asked to say a few words about the so-called Carbon Border Adjustment Mechanism, which is an important element in the new „Fit for 55“ initiative of the European Union. The CBAM and the ,,Fit for 55” package as a whole is highly relevant for Iceland and Norway, as we have agreed to join the EU in a collective goal within the Paris Agreement.

Before I discuss the CBAM, let me say a few words about collective action in climate affairs. The climate crisis is a global crisis, and demands a global response. No individual country can reduce the impact of catastrophic climate change on itself by only domestic action. The same applies to even a sizable grouping of countries, like those in the European Economic Area. We need cooperation rather than a blame game. We need rules and actions that are effective and seen as fair. Most people´s lives will improve in a low emission society but it is important to carefully assess potential socio-economic impacts of decisions and actions, including how they might affect employment. The impact of CBAM must be analysed, having in mind the principle of Just Transition.

We must all be part of the solution, and we must try to ensure that our individual actions are part of a coordinated global response. That is a very tricky task, but the alternative is an unmitigated global climate disaster. Needless to say, that is a totally unacceptable alternative.

This is one reason that Iceland is happy to engage in climate mitigation with its European neighbours and partners. The Emissions Trading Scheme is part of the agreement on the European Economic Area, and we have participated in the ETS for over a decade. More recently, Iceland joined the EU and its Member States in joint fulfilment of the goal of the Kyoto Protocol. Still more recently, Iceland and Norway made an agreement on joint fulfilment of the Paris Agreement target for 2030.

Common rules and collective action benefits Iceland, as well as others. Economists tell us that a system like ETS functions better with wider participation – it brings the cost of mitigation down and effectiveness up. Common rules create a level playing field and ensure fairness and predictability for industry and individual countries. It would be wonderful to have an effective global price on carbon, achieved by a carbon tax or cap-and-trade system, or a combination of these. It would also be ideal to abolish immediately all harmful subsidies for fossil fuels and other sources of emissions. In the absence of this, we must work on a European response – to strengthen an effective price on carbon in Europe and push for the same at an international level. This is crucial.

Last year, Iceland and Norway and the EU enhanced their 2030 target from 40% reduction in emissions to 55% reduction. That is an ambitious target in comparison to others, although I believe that we need to do even more than that. The new report by the IPCC shows us the stark reality of climate change. We are already seeing shocking extreme weather events in Europe and around the globe, from receding glaciers to raging wildfires, from deadly surprise floods to record-breaking temperatures everywhere. But these are just a mild prelude to the catastrophes ahead, if we do not act now and act fast.

And let me now turn to the Carbon Border Adjustment Mechanism. It is important to state that it is only one of many actions proposed to deliver the promise of 55% emissions reductions by 2030. It is a technical economic instrument that is complex in design and will certainly face obstacles in its implementation. I will not read out here the description of the CBAM or delve into the technical details, but try to describe the broad outline of the Mechanism and what it is intended to accomplish.

The key word is perhaps „border“. The CBAM is not a tariff, but it works in some ways like one. It puts a cost on imports that reflects their embedded carbon intensity. Not on all imports, but on a few strategic items to begin with – namely: aluminium, cement, electricity, fertilisers and iron and steel. This will be done gradually, and more imports are planned to be added later. The Mechanism will replace measures in the EU-ETS that are now designed for those products, that are in a so-called „leakage list“. They have received free allowances up to a point in the EU-ETS. This is to ensure that higher carbon prices in Europe will not push these industries to move to other parts of the world, where there are low or no carbon prices.

The CBAM is an improvement from the current arrangement, according to the proposal. One reason for this is that it sends a clear signal to Europe‘s trading partners that they have to tackle the question of carbon emissions. If this is not done, the CBAM will make their products more expensive. If exporters to Europe want to avoid this, they can put into effect measures to cut emissions. This makes the CBAM different from ordinary tariffs – you can avoid charges by effective climate mitigation measures. It pays to go green – this is the message of the Mechanism to the wider world.

Proponents of free trade tend to be skeptical of measures such as the Carbon Border Adjustment Mechanism. They fear that they are protectionist measures at heart, with a green paint to make them look better. Here, the details matter. A poorly designed instrument could indeed be protectionist and, even worse, be of little or no use for the climate. This is clearly not the intention here, and should not be a concern unless major changes are made.

It is entirely valid to take climate concerns into account in international trade, as well as in other aspects of economic life. Our future depends on doing just that. The climate crisis is an existential threat to our civilization. An effective price of carbon, that will send the signal required to cut emissions fast, is the price for a viable future. We can afford it. What we can not afford is to go on business as usual.

Ladies and gentlemen,

The Carbon Border Adjustment Mechanism has not been agreed upon and has not taken effect yet. European countries are studying the CBAM and other parts of the „Fit for 55“ package. This includes Iceland and Norway, who have an agreement with the EU on common climate measures within the framework of the Paris Agreement. Like I said before, the CBAM is only one of over a dozen measures proposed, of updated legislation as well as new initiatives. They deserve to be studied closely, but the general impression is that they form a good basis for strengthened action.

There is no silver bullet to solve the climate crisis. We need to cut emissions everywhere we can. We need to soak up carbon by planting trees, reclaiming soil and ecosystems and by carbon capture in geological strata. We need to conserve carbon stocks in wetlands and forests and other natural systems. We need nature-based solutions and we need new green technology. We will need strong targets, regulations and standards. We need an effective price on carbon.

Putting a price on carbon is of key importance. It sends a powerful signal to industry and others to cut emissions and it helps to guide us in cutting emissions where the cost is lowest and action is most effective. We should not have the illusion that the transformation ahead to a low-carbon society will have no cost involved. But we also need to point out that there are many benefits waiting for us in building a greener economy – less pollution, nature protection, new jobs in innovation and exciting clean industries. An effective price on carbon helps to cut the cost and boost the benefits. A price on the carbon footprint in international trade is a logical part of this. The Carbon Border Adjustment Mechanism is a step in that direction, which we should support, and ensure that it will work as intended.

Thank you,