Europe Agrees First Global Carbon Border Tax

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--The European Union (EU) has struck a deal with Member States to introduce a carbon dioxide (CO2) emissions tax on imports of polluting products including cement, iron and steel, aluminum, fertilizers, electricity and hydrogen.

The controversial move will see producers of those goods having to buy certificates under the Emissions Trading System (ETS) to cover embedded CO2 emissions--something European firms producing the same goods have had to do for years. The goal of the Carbon Border Adjustment Mechanism (CBAM), according to the EU, is to put "a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries." It will also help protect Europe's industry from the long-standing situation of being undercut by cheaper goods that come from countries with less stringent environmental rules. The tax will be slowly phased in from October 2023 to prevent upsetting the region's economic trade with external partners.

CBAM is seen as a key support for the European Green Deal, the EU's long-term growth strategy to make Europe climate-neutral by 2050. To reach this target Europe must reduce its emissions by at least 55% by 2030, compared to 1990 levels. The European Commission said that as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called "carbon leakage." This occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.

"I welcome the political agreement reached this morning on the Commission's proposal for a Carbon Border Adjustment Mechanism," said EU President Ursula von der Leyen. "This is a central part of our European Green Deal, preventing the risk of carbon leakage. It is a huge step forward, as we raise our climate ambitions."

The gradual phasing in of CBAM will start with importers only having to report greenhouse gas emissions (GHG) embedded in their imports (direct emissions), without making any financial payments or adjustments. The tax will come into play in 2026 for importers while EU industries currently benefiting from free ETS certificates will also have to pay.

The proposed tax has been welcomed by EU industry groups but labeled as protectionism by those exporting polluting goods to Europe. Koen Coppenholle, chief executive officer of the European Cement Association, CEMBUREAU, said: "The agreements on CBAM and ETS are essential to create a global level playing field on CO2 and support our sector in its transition to carbon neutrality. It is positive that the EU institutions strengthened some key aspects of CBAM. Looking ahead, we need to focus on CBAM implementation and its watertightness, to ensure the mechanism fully equalizes CO2 costs between EU and non-EU suppliers. It is also essential that policymakers support EU industries like cement, which are confronted with unsustainably high energy costs at a time some of our trading partners are launching massive subsidy programs."

In terms of countries most affected, Russia was top of the list--at least before the Ukraine war--with sectors including fertilizers (26.9% of EU imports), iron and steel (13.9% of EU imports) and aluminum (12% of EU imports). Current EU sanctions have banned those imports for now. Chinese imports affected by CBAM are aluminum (7.9% of EU imports) and iron and steel (12.1% of EU imports). Turkey, which supplies almost 39% of EU cement and 12.6% of its aluminum and steel, would also be hit hard by CBAM. However, both China and Turkey are working on implementing versions of the Union's ETS system which will help offset costs.

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