The EU has reached an agreement on the world’s first carbon tax
On December 13, EU negotiators agreed to pave the way for Europe to implement the world’s first levy on carbon-intensive goods entering its market.
The so-called carbon border adjustment mechanism (CBAM) will mirror the EU’s domestic carbon price, protecting European industry from cheaper, polluting imports elsewhere.
It will initially apply to imports of iron and steel, cement, aluminum, fertilizer, electricity, and hydrogen.
The agreement was signed the day after the G7 industrialized nations announced the formation of an “international climate club” to promote greener industries.
“For the first time, we will ensure equal treatment of our enterprises that pay a carbon price in Europe and their foreign competitors that do not,” said Pascal Canfin, chairman of the European Parliament’s environment committee.
“This is a significant step forward that will allow us to do more for the environment while protecting our businesses and jobs,” he said in a statement.
“CBAM will be a critical pillar of European climate policies. “It is one of the few mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industries,” said Mohammed Chahim, lead negotiator for the European Parliament.
Hydrogen was added to the scope.
The Czech Republic’s industry and trade minister, Jozef Skela, who led the negotiations on behalf of the EU’s 27 member states, also praised the agreement as an essential step forward in European climate action.
“This mechanism promotes the import of goods into the EU by non-EU businesses that meet the high climate standards applicable in the 27 EU member states,” he explained. “This will ensure a balanced treatment of such imports and is designed to encourage our partners worldwide to join the EU’s climate efforts,” he affirmed.
The levy will be implemented on October 1, 2023, for a trial period, imposing only reporting requirements on imports of goods covered by the scheme. Following this transition period, the total levy will be implemented.
On the other hand, the end of the test phase has yet to be determined and will be discussed in further negotiations at the end of the week.
According to the European Commission’s initial proposal, which was tabled in July 2021, the levy will cover imports of iron and steel, cement, aluminum, fertilizers, and electricity. However, following the agreement on Tuesday, it will also include hydrogen, indirect emissions under certain conditions, and some downstream products.
Unless they can demonstrate that they have already been accounted for by climate legislation in the producer country, companies importing these into the EU will be required to purchase certificates to cover the carbon emissions embedded in them.
The levy will eventually replace the heavily criticized allowances that EU industries receive for free under the bloc’s carbon market, the Emissions Trading Scheme (ETS).
“It is an alternative to our current carbon leakage measures, allowing us to apply the polluter pays principle to our industry,” Chahim explained.
During the negotiations, the European Parliament pushed to broaden the scope of the levy beyond what the European Commission proposed in 2021.
According to a November paper from the EU executive that assessed the possibility of including more sectors, lawmakers successfully included hydrogen, primarily produced from coal in non-EU countries.
The paper said that, while imports of hydrogen are currently relatively low, they are foreseen to grow in the coming years and that “the introduction of hydrogen appears less complex than the inclusion of other sectors under consideration for an extension.”
The European Parliament also successfully included processed products such as screws, bolts, and similar iron or steel articles.
After a review, other downstream products could be added before the transition period ends. Before the transition period ends, the inclusion of organic chemicals and plastics will be evaluated.
In addition, the European Parliament wanted to include indirect emissions caused by the production of energy used in manufacturing.
This proved to be a major stumbling block during the final 10-hour negotiation. So, finally, indirect emissions will be included “under certain conditions,” with more work needed to finalize the details.
Exports and the phase-out date have been left blank.
Two significant components of the levy are still up in the air. These are the timeline for when the levy comes into force and whether to compensate EU exports, which the tariff won’t protect.
These issues will be addressed in a “jumbo” round of negotiations later this week as part of discussions to reform the EU carbon market.
“I am optimistic that the picture for this mechanism will be complete by this weekend,” said Nicu tefănuță, a Romanian MEP who negotiated on behalf of the centrist Renew Europe group in the European Parliament.
“CBAM is the EU’s game changer for sustainable trade and will help us meet the Paris Agreement target,” he added.
Meanwhile, the industry is pushing hard for a gradual phase-out of free allowances and export support, warning that without these, the levy will fail to deter businesses from leaving the EU.
“A robust CBAM that helps the industry compete for means a gradual transition from free allowances to full CBAM certification,” according to AEGIS Europe, an industry group made up of more than 20 European manufacturing associations.
“At the WTO level, it also necessitates a workable and defendable export solution, as well as a very sophisticated and solid anticircumvention regime,” it added.