An unprecedented and controversial carbon tax will be applied to goods imported to the European Union from 2026, the flagship measure in a sweeping suite of European Commission policies unveiled today to meet the bloc’s .
The tax will mean companies importing iron and steel, aluminium, cement, fertilisers and electricity to the EU will have to buy a certificate for every tonne of carbon dioxide embedded in their goods. In theory, it puts importers’ costs on a par with firms within the EU who have to pay for similar certificates in the . “The idea is to put foreign producers on a level playing field so they are paying an equivalent carbon price,” says Johanna Lehne at the think tank .
Formally known as the , the scheme is the first of this scale and scope globally. Others may follow: the UK is . The CBAM’s central aim is to combat “carbon leakage”, the risk of a company in the EU responding to the union’s climate policy costs by relocating outside the bloc in a country that may have a cheaper but more polluting energy supply. That danger could grow as the EU ratchets up its future ambitions to cut emissions.
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A secondary goal is to provide an incentive for non-EU countries to increase their ambition on climate change. In theory, a fertiliser firm in Turkey would have to pay lower taxes to ship their product to the EU if Ankara used policies to clean up the country’s electricity grid.
However, the border tax has generated a storm of pushback even before it was officially outlined today, with China, Australia and other countries warning against trade barriers and protectionism. It remains to be seen if the scheme can win over critics and play an important role in fighting climate change. At the most extreme end, the EU could be forced into a climbdown akin to .
The levy will cut global CO2 emissions by just 0.3 per cent , but it shouldn’t be judged on its direct effect on emissions but its indirect impacts, says Lehne. “It’s about mitigating carbon leakage, allowing increased climate ambition in the EU domestically and potentially creating that incentive for climate action abroad.”
At a fundamental level, the tax will have to be compatible with World Trade Organization (WTO) rules. at the Free University of Brussels, Belgium, is sure the principle of the scheme will be compatible with the WTO, but the way it is implemented may be how other countries try to fight it through the WTO. “I think there will be an international legal challenge,” says Lehne.
One surprise in the plan today compared with leaked drafts is that producers outside the EU won’t have to start paying until 2026. But they will have to start reporting their products’ carbon from 2023 to the end of 2025. Initially, each tonne of carbon in steel or other products imported from outside the EU will be assumed at a generic benchmark. Later, producers will have to draw up more precise estimates of the embedded carbon, to be verified by a future independent body. That could help wider climate action, by providing better CO2 data for supply chains generally.
The price that foreign producers pay will be the tied to the weekly average for the EU’s internal carbon market, where a tonne of CO2 currently costs around €50. An estimated €2.1 billion a year will be generated in revenue, going to the EU budget rather than, say, being ring-fenced for action on emissions.
The biggest weak spot, from a climate change perspective, is that steel manufacturers and other producers within the EU will continue to get a number of “free allowances” in the EU’s carbon market for their CO2 emissions, with the amount declining over time and ending entirely in 2035. Each allowance entitles a company to emit a tonne of CO2 for free. The compromise appeases European industry. However, says Lehne: “It is a concern for us, because it dampens incentives for industries to invest in cleaner processes.”
Globally, will be disappointed that the tax makes no exemptions for the world’s poorest countries, which are concerned the measure goes against the multilateral spirit of climate efforts such as the Paris Agreement. The only exemption to the levy is if other countries have some form of carbon pricing scheme of their own.
But for all its potential flaws, the carbon border tax is a bold new way to try fighting climate change, and even its existence will make a difference. “This would be the first time carbon pricing applied to producers in a jurisdiction is applied to those outside. That in itself is an incredibly huge step both in terms of the trade regime and what impact it will have on the climate regime,” says Sapir.
