The European Union presented its proposed carbon border adjustment mechanism regulation on July 14 as the bloc tries to fight climate change and level the playing field for its domestic enterprises.
The mechanism, announced last year in the European Commission’s communication on a Green Deal, aims to protect the EU’s domestic industry from carbon leakage. The bloc intends to tax imports based on the greenhouse gases emitted to manufacture them, opening up a new front in the battle against climate change by setting the world’s first limits on carbon in traded goods. The commission says it wants to stop polluting industries from shifting production outside Europe to avoid EU emissions limits and then exporting back into the bloc.
Many EU companies that make goods are required to buy permits for the climate-warming carbon emissions produced in the process. That extra cost raises the price of the product and is designed to encourage manufacturers to reduce their emissions. But companies in many other countries—including the United States—don’t face the same emissions rules, so imports sold in Europe can end up being cheaper.
The planned mechanism also serves as a policy tool to encourage third-party countries to reduce their greenhouse gas emissions and start regulating carbon emissions.
The Wall Street Journal, citing a draft of the legislation, said European importers would be required to buy certificates covering the carbon content of their imports in certain sectors. The rules would initially apply to heavily polluting industries—steel, aluminum, cement, fertilizers, and electricity—and add other sectors over time. The draft says the rules could come into effect during a transitional period starting as early as 2023 and be fully in force in 2025, the newspaper reported, “though officials say those dates could change in the final proposal.”
The draft legislation proposes charging a carbon price based on the European Union’s emissions-allowance market, which regulates the bloc’s power plants and factories. That price, which would be applied to each ton of carbon dioxide (CO2) emitted to make an imported good, has climbed to more than EUR 50 (USD 61) a metric ton of CO2 from about EUR 30 earlier this year, as traders anticipate that the bloc will ratchet down emissions caps.
The United States and Japan have already voiced concern about the planned tax. Special Presidential Envoy for Climate John Kerry told the Financial Times in March that the tax adjustment should be a “last resort” and that it had “serious implications for economies, and for relationships, and trade.” And Politico cited a Japanese government spokesman as saying at the G7 meeting this month that the EU’s plans were “one of the quite controversial, heated discussions among the concerned parties.”
A 2016 study suggested that an EU border carbon tax would reduce imports from major trading partners by between 0.3% for Brazilian products and 1.3% for those from the United States. Ensuing trade retaliation could cut EU agri-food exports by USD 3 billion, and other European sectors would also face retaliation, the study found.
This article was originally published in IISD’s Trade and Sustainability Review, Volume 1, Issue 3.